Question

Case III: The Japanese Slump Japan has been experiencing a persistent level of deflation and a high risk of liquidity trap since the 1990s. Accordingly, some economists recommend that the Japanese government pass large cuts to encourage more consumer spending. Although this advice was followed to some tax makers were reluctant to enact very large tax cuts because, they wanted debt arose in part extent, Japanese policy to avoid budget deficits. In Japan, this reluctance to increase government because the government was facing a large unfunded pension liability and a rapidly aging Other economists recommended that the bank of Japan expand the money supply population. nominal interest rates could not go much lower, then perhaps more rapid growth could raise expected inflation, lower real interest rates, and stimulate investment more rapidly. Even if money spending. Question a. Based on the theories and some examples we learned in class as well as by doing your own research, discuss what mix of monetary and fiscal policy will be the most likely solution to Japan's economic slump? the effects of each recommended monetary and fiscal policies on the market b. Analyze for loanable funds, foreign exchange markets, the net capital outflow and the trade balance in the economy. Other than monetary and fiscal policies, is there any other additional measures to be c. taken as part of the solution for the above problems?

please this is 50marks help me. it is my presentation explain vividly and with appropriate graphs

Answer 1

(a) Japan' economy was in such a situation where applying the fiscal policy in which they either wants to increase tax or remain it at constant because the rising level of pension and old age people(government have to pay them from their tax collection) and the rising expenditure because of deflation in the economy(they need to put some extra cash in the economy by increasing investment level and employment level so that everyone have enough money to pay for goes, so that prices will rise automatically). Applying Monetary policy alone like increasing money supply in the economy which lowers the interest rates and overall demand would rise.

Applying both the policies can have catastrophic effects on the economy because applying fiscal policy which decreases interest rates and increase investment spending, money supply also decreases interest rates and helps increasing investment level in the economy. Thus both these policies can fasten the impact together in the economy.

(b) Effects on loanable funds

Monetary Policy that raises interest rate and reduces borrowing in economy as contractionary economic policy and vice versa is expansionary policy. Refer to the diagram, you will understand both effects.

Expansionary fiscal policy increases the deficit. As a result, the government must borrow more and increase its debt. That increased borrowing increases interest rates and crowds out private investment. Contractionary fiscal policy decreases the deficit and therefore decreases borrowing which causes interest rates to fall and the quantity of investment to increase.

Notes So

Foreign Exchange Markets

Expansionary Monetary policy refers to ways by a central bank to infuse more money in an economy. Because of expansionary policy supply of money in an economy increases leading to decrease in cost of money i.e. interest rates reduces. Now, because of reduced interest rates, the value of interest yielding securities reduces. If these securities are held by foreign investors, the real value of such investments reduces. So, in order to protect themselves against loss, they sell their investments. Since securities are sold and proceeds are converted into foreign currency, the demand for foreign currency increases therefore foreign currency appreciates or domestic currency depreciates. Thus, it takes more of domestic currency to buy foreign currency and vice versa with contractionary monetary policy.

Expansionary Fiscal Policy helps in decreasing taxes and increasing government spending in the economy which increases the demand for local products in the economy and reduces demand for imported products which lowers the exchange rate as we are giving more importance to domestic currency and less to foreign currency. Foreign exchange between US and India is $/INR, if we imports less from USA, value of its currency depreciates thus the exchange rate too and the vice versa is the case with contractionary Monetary policy.

(c) Other than monetary policy if Japan needs to raise money supply in the economy they have to think various ways that can raise money supply. There are many government owned stocks(not giving them profits), buildings(Ancient building) and other inventory which are useless for them, they can sell them to contract money supply and vice versa for expand money supply.

Apart from reducing taxes government should think of using money in an productive way where the wastage of money is less like spend money on education if you think your economy will get a boost with better engineers, doctors, scientist etc in long run. Government should define the short-long term goals like spending on education is a long term goal. Building a world class hospital where people are willing to pay for the prices could be a short term goal.

Government basically needs to think in a way that how they can invest less and get maximum possible profit from the economy without increasing taxes and reduces expenditure.

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