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Topics: Monetary policy, Public finance, Economics Pages: 5 (1694 words) Published: February 18, 2014
Macroeconomics assignment
Danish Behal

Right now we are witnessing a struggle between two camps that can be named the “stimulators” and the “austereians.” Both warn that a worldwide depression will occur if governments now make the wrong choices: the stimulators say the danger lies in spending too little and the austereians oppose on spending too much. Each side also has their own economic aspect austerity refers to reduced spending and increased saving in the financial sector by governments to reduce expenditures in an attempt to shrink their growing budget deficits. which was seen clearly post economic crisis of 2008 in most of European countries. Who tried to follow the successful use of austerity used by Canada previously. Success of liberal prime minister Jean Chretien's "bloodbath budget" of 1994. When Chretien took his position in 1993, the country was in very poor economic shape. By the following year, the budget deficit was running at around 9% of GDP, and gross debt had reached more than 100% of GDP. So Chretien and his finance minister Paul Martin took a tough approach of, cutting government spending by 15% in real terms between 1994 and 1995, from all areas - including health and education. Thousands of people and especially in the public sector lost their jobs. But the risk paid off. The budget was brought back into surplus in only three years, while booming private sector more than made up for the losses in government jobs( BUT REMEMBER Canadian step was successful in completely different environment to that of today. The global economy was strong, including the neighbouring US, which boosted consumer demand.) .whereas stimulus refers to attempts by governments to financially stimulate an economy. An economic stimulus is done by use of monetary or fiscal policy, using tactics such as lowering interest rates, increasing government spending and quantitative easing. In easy words injecting money in economy. which was attempted by America to rush out of that 2008 crisis. which can be seen days after Obama's inauguration in January 2009, a huge stimulus package worth an enormous $787 bn was pushed through without a single republican vote. The American Recovery and Reinvestment Act has paid out more than $755 bn so far which helped them a SHORT TERM recovery, growing by 3.8% in the third quarter of 2009 and 3.9% in the fourth. But the growth has faltered, falling to only 0.4% in early 2011, and despite the money being pumped into the economy, joblessness continue to rise. Then what is better austerity or stimulus? well so referred austerians who stipulate on orthodoxy say that developed nations/ leading debtors (UK, USA, Japan, Italy) should curb or cut their budget deficits because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. On the other hand so referred stimulators argued that those who push for austerity in the face of recession are either doing so for political control or obsession about austerity i.e. "orthodox". Keynes argues that, cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates. Both approaches seem to be partially correct but still :

1 we see world still in recession.
2 Declining economic growth.
3 With unemployment at around 8.5%.
4 World debt rising on whole not...

References: Sloman, J (2012) Economics: Eight Edition
Frankel, J (2012) Fiscal austerity vs. Fiscal Stimulus
http://www.voxeu.org/article/procyclicalists-fiscal-austerity-vs-stimulus
Debating Europe (2012) Austerity versus Growth?
http://www.debatingeurope.eu/growth/austerity-versus-growth/
Austerity Vs. Stimulus: The New Ideological Divide: http://www.forbes.com/sites/greatspeculations/2010/06/29/austerity-vs-stimulus-the- new-ideological-divide/
the multiplier: http://www.economicshelp.org/blog/6139/economics/why-did-europe-expect-fiscal-consolidation-to-work/
Paul Krugman on Austerity: http://www.nytimes.com/2010/06/18/opinion/18krugman.html?ref=paulkrugman&_r=2&
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