The Limits to Macroeconomic Policy Essay

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The Limits to Macroeconomic Policy A country’s economy represents an equilibrium driven by the vast workings of many moving parts. Some of these parts include governments, policy makers, trade partners, international investors and banking authorities. Today’s technological advancements have made it easier than ever for monies to traverse national borders quickly and efficiently. This capability facilitates inflows and outflows of capital in response to signals. Not all of these signals are economic yet the effects can have a devastating impact.
Assessment
Economic crisis has precipitated many changes throughout the course of history. Whether it is the great depression of the 1930’s, the Latin Debt crisis in the early 1980’s or more
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An example: The Fed cuts interest rates to reverse an economic downturn. If this downturn is deep and the interest rate adjustment does not reverse the negative trend, then a correction to the fiscal policy may be warranted. This is because the monetary policy runs out of ammunition, requiring complementary support from the fiscal policy. In this case, a tax cut from Congress can help raise aggregate demand for goods and services. Using a tax cut in addition to lowering interest rates places more money with the individual, making capital investment and consumption opportunities more attractive.
Case Study Highlights This case study utilized Argentina’s challenges in the 1980’s as the foundation for evaluating how economic policies require change over time. Policies facilitating success in 1950 do not translate into success in the 1980’s. The Latin Debt crisis of the 1980’s hit Argentina especially hard. Argentina experience an inflation increases of 3080 percent while gross domestic product (GDP) fell by 7 percent (Gerber, 2011). This hyperinflation prompted macroeconomic reform in order to regain control. In 1991 Argentina decided to fixed its currency rate 1:1 with the U.S. dollar. This put pressure on the central bank to maintain a dollar for every peso put into circulation. This pegged system begun to restore confidence with
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