Case Study - Japanese Deflation

Added on - 13 Sep 2019

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Macroeconomics[Type the author name]
Macroeconomics2Macroeconomicsdeals with total or big aggregates such as national income, output andemployment, total consumption, aggregate saving and aggregate investment and the general levelof pricesFirst Case study is aboutJapanese Deflation:Stagnant Japan Rolls Dice on New Eraof Easy Money.Japan is the world third largest economy;one of the challenges faced by Japan’scentral bank governor is stagnant growth in the economy.Japan's new central bank governorapply policies to rectify falling prices to lift wages and profits in the world's third-largesteconomy.Economist suggestsgovernor have to use central-bank policies to boost stagnantprices. The new central-bank governor has declared a mission to reach the bank's target of 2%inflation "as soon as humanly possible.If the yen continues to weaken, inflation picks up, prices rise, then incomes rise—that's all good.But there will certainly be a time lag'' before the benefits get to consumers, "If only prices risebut incomes don't, then people have no choice but to cut back on luxury items'' like cab rides.Stagflation arisesin an economy when there is show economy growth or declining GDP withhigh inflation in the economy, which means prices are high and there are relatively highunemployment in the economy.The same situation arises in japan and central bank governorseeking policies to rectify the situationA second case study is onGovernment Spending,Laffer, and Moore: Obama's Real SpendingRecordas the case study depict.Under Presidents Bush and Obama, government exploded as ashare of the economy and there is excessive government spending to stimulate the economy.Firstly, eight years in the president ship of Bill Clinton’s government spending fell. When hebecame the president government spending was 23.5% of GDP and when he left in 2001 it was19.5 % of the GDP.Keynesians, of course, are advising more deficit spending and easy money.
Macroeconomics3But as the case study when spending declined sharply the economy boomed under PresidentClinton, and when spending soared under Presidents Bush and Obama, the economy tanked.Maybe Keynes was wrong and Milton Friedman was right when he warned that governmentspending is taxation and that government can't tax an economy into prosperity. Friedman made itclear time and again that restraining government spending stimulates the economy by liberatingprivate resources.However, the economies are facing the same problem of declining economic growth but thesolution for both economies is different, in Japan economist suggest expansionary monetarypolicies to devaluate the currency as devaluation makes countries export cheaper and importexpensive. A weaker yen also would boost profits for Japan's exporters by making goods cheaperabroad, eventually triggering higher wages and increased investment. Growing exports alsowould push up stock prices, encouraging people to put more of their money in the stock marketinstead of bank accounts.On the other hand, US government need the contractionary fiscal policy to stabilize theeconomy, The huge increase in spending as a percentage of GDP under Presidents Bush andObama is the reason we are experiencing the slowest recovery since the Great Depression. AsMilton Friedman understood, an economy cannot spend or tax itself into prosperity. Thus, USgovernment should apply a contractionary fiscal policy to bring the economy back to health. Theright point of focus is not at what pace spending has grown under President Obama but insteadhow much more he needs to cut spending from its bloated levels.The most difficult concepts in this case study are to find to that which economy policy should thegovernment use to stabilize an economy. government have two option whether they should use a
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