Can you discuss the three major economic theories (laissez-faire, Keynesian economics, monetarism) that have influenced the economic policy-making process in the US? How do Congress, the President and the Federal Reserve Board make economic policy?
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Two of the three theories that you mention here are closely connected and could be used in conjunction with one another. The third is very much opposed to the other two.
Laissez-faire capitalism and monetarism are compatible with one another. The idea of laissez-faire holds that the government should not interfere in the economy. In this view, Congress and the president would have a very minor role in economic policy. The government would mostly stay out of the way of the economy and let it regulate itself. This would, proponents believe, allow the economy to achieve maximum efficiency and productivity. Monetarism could act as a complement to this. Monetarism holds that the government should simply increase the supply of money by a predetermined amount each year. This would allow for predictable economic growth. In this view, the Fed would be in charge of increasing the money supply each year, but it would not really play much of a policy-making role. Instead, it would simply carry out a pre-made policy. Thus, these theories go well together because they both want to do away with discretionary government intervention in the economy.
Conversely, Keynesianism calls for the government to be much more involved in the economy. In this view, the government has to use the levers of fiscal policy to adjust the economy. Here, Congress, the president, and the Fed are very important. To Keynesians, the government needs to use fiscal and monetary policy to affect aggregate demand. When the economy is in a recession, the government (Congress and the president) should increase spending and reduce taxes. If there is excessive inflation, the government should reduce spending and, perhaps, increase taxes. When the economy is in a recession, the Fed should loosen its monetary policy, doing such things as lowering interest rates. All of these government actions would put more money into the hands of consumers. This would inspire them to buy more, thus raising aggregate demand and improving the state of the economy. In this view, the government is playing a large role in determining how the economy is doing and in adjusting policy to keep the economy stable and growing.
thanks for your prompt answer. Can you expand the answer a little big more about How do Congress, the president and the federal reserve board make economic policy? thanks
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