Government Policy Should Be Active for the Financial Crisis

2205 Words9 Pages
1. Introduction Adam Smith (Adam Smith, 2009) insisted that the best way to improve personal and societal interests is to operate with an Invisible Hand without government intervention. However, in reality, the free market economy is hard to manage due to limitations which include natural monopoly, inadequate information, external effects, the inequality of income distribution, and the shortage of a production of public goods. Therefore, in order to solve these aforementioned problems, the government needs to play a role by establishing appropriate economic policies. However, government interventions do not always result in positive outcomes. Despite the original good intent, it is sometimes impossible to correct market failures, and it can cause ineffective distributions. Therefore, the government policy makers have debates over many different topics, whether should being active or passive, have been in the center of controversy. Especially, there is a shared concern across the world about the global financial crisis. At this critical moment, government policies are very important. In addition, economists have different ideas about fiscal policy and monetary policy. In general, however, the better policy depends on each individual’s interest. Therefore, a government should be able to look at both positive and negative sides of fiscal policy and monetary policy. In addition, government has to implement both policies effectively and set a direction which will lead to an effective interaction of different policies. Through the basic fiscal and monetary policy concepts, this paper will describe why the government policies should be discretionary and how the government should utilize both policies interactively to maximize economic growth in the economic crisis. 2. Should government policies be active or passive? 2-1. The US applied discretionary policy
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