Macroeconomic Article Review

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Macroeconomic Article Review
Part I: Introduction and Article Summary
According to Reuter’s reporter, Jake Spring, the International Monetary Fund has
lowered its projections regarding expected global economic growth. As a result, the IMF has
called for accommodative macro-economic policies that will be geared towards sustaining a
stable global economy. It is prudent to note that International Monetary Fund is a global
regulator of macroeconomic activities by advising on exchange rates, promoting international
monetary cooperation and fostering stability of global exchange rates. As a result, it is a major
concern for the IMF to forecast and advice on suitable macroeconomic measures that will ensure
sustainability of the global economy. In advising that countries embrace accommodative
monetary policies, it stands rife that the IMF is advocating for economic stimulus programs. The
term accommodative monetary policies denote the deliberate process through which Central
Banks formulate policies seeking to stimulate growth of national economies by increasing money
supply. Such policies are aimed at reducing the cost money making it cheaper and easier to
The Reuters’ article titled “IMF cuts global growth outlook, calls for accommodative
policy”, speculates that the global economy will be faced with inflation in the year 2015, thus
calls upon central banks of national governments to support economic growth through structural
reforms and embracing of expansionary monetary policies. This proposal is made in accordance
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to the World Economic Outlook report which estimates that the global economic growth will be
3.5 in 2015. Among the factors attributed to the growth there are the depreciating yen and euro,
lower oil prices among other negative economic forces such as the anticipated stock market crash
in the U.S. The IMF’s projection is grounded on the argument that the lower oil prices will
impact on imports and exports and this will directly influence on the value of currencies. The
report indicates that countries dependent on Euro currency are likely to experience more
inflationary margins and slow economic growth as compared to those pegged on the dollar. In
response to the IMF report, countries within the Euro Zone will likely lower their interest rates
while the Federal Reserve is expected to raise this indicator.
Part II: Theory Review and Analysis
The article in question, stipulates expected economic conditions for the year 2015. The
arguments raised by the IMF in support of expansionary monetary policies provide a basis for
theoretic analysis and review. Whereas countries in the Euro Zone are required to conform to the
accommodative monetary policies, those countries pegged on the US dollar are not mandated to
follow it. In macroeconomic studies, monetary policy refers to the process through which
monetary authorities, mainly the central bank of a country controls the supply and demand of
money. They often target interest rates and inflation rates in an attempt to ensure the stability of a
currency, prices and increased confidence in the monetary system. By so doing, a country hedges
its currency against inflation and possible economic recession. The goals of instituting monetary
policies are focused on ensuring economic stability and growth, reducing unemployment rates
while simultaneously sustaining a stable exchange rate against other global currencies. This
review and analysis will thus highlight the reasons and theoretical justifications in support of
recommendations made by the IMF to foster the optimization of economic growth.
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Monetary policies can be classified into two: contractionary and expansionary.
Expansionary monetary policies lead to a rapid increase in the total money supplied in an
economy, while contractionary attempts to decrease or shrink the amount of money supplied in
the market. Traditionally, expansionary policies have been implemented to combat increasing
unemployment rates during recession. The central banks lower the interest rates to ease credit
and entice business people into taking loans and expanding their businesses. More potential
investors are also attracted into a country so that they create businesses and increase employment
opportunities. On the other hand, contractionary policies are implemented so as to reduce
inflation. The impact of these policies is felt in the increased interest rates which, in turn, reduces
borrowing and investment. Practically, the IMF’s decision to advise countries on the need to
adopt accommodative monetary policies is justifiable. This is because monetary policies relate to
the management of uncertainties and expectations. These policies are impacted by interest rates
which determine the price of money as well as its supply in the market. Monetary tools use
various tools to influence economic outcomes such as exchange rates, inflation, economic
growth and unemployment. This implies that if the IMF failed to advise countries on the
expected global situations, then it would be risky for the global economy as a whole.
Monetary systems are controlled by Central Banks, which implement these policies and
ensure that the commercial institutions adhere to them. The monetary authority such as the
central banks have the power to alter the demand and supply of money which ensures the
achievement of policy goals. In addition to contractionary and expansionary monetary policies,
there is accommodative, neutral and tight policies. Accommodative policies describe a situation
where monetary authorities focus on creating or stimulating economic growth. Neutral policies
are intended to sustain an economy at a given level, while tight policies are focused on reducing
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inflation. The IMF further recommends on other monetary policies that will facilitate economic
growth. This refers to the possibility of reducing monetary base while increasing reserves. These
two options will contract or reduce money supply and a reverse will expand or increase it.
Among the tools that can be used by central banks there are open market operations (OMO).
They are defined as the process of managing the quantity and circulation of money by buying
and selling financial instruments such as bonds, foreign currencies and treasury bills. OMO
result into variations in the currency base thus impacting on market circulation of money. The
other tools could include moral suasion where the central banks lobby key market players to
implement certain policies so as to achieve a desired market growth index.
The monetary theory stipulates that the aggregate demand for money is influenced by the
price charged in terms of interest rates. This means that the Fed’s decision to raise interest rates
is motivated by the need to implement contractionary policies, while the decision by European
countries to reduce interests as advised by the IMF are motivated by their need to stimulate
economic growth by increasing disposable income. This, correspondingly, will stimulate
increased Gross Domestic Product (GDP). In this case, GDP is regarded as aggregate output
derived from a country within a given period, mostly one year. The interaction of the monetary
theory as proposed by the IMF is illustrated in the figure 1 (check appendix).
Part III: Personal Opinion and Conclusion
From a personal viewpoint, I support the decision by the United States to deviate from
the economic advice given by the IMF. This is because the United States perceives
accommodative policies to be associated with contractionary policies where a raise in the interest
will lead to a reduction in the supply and demand of money. This will lead to a reduction in
economic activities. Furthermore, it can be referred to as neutral or tight policies which will
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shrink economic growth or stagnate it. Which is vital to mention, this goes against the advice by
the IMF. Though, since the US uses dollar currency, its economic condition is stimulated by the
need to strengthen it against Euro. On the other hand, those countries dependent on Euro are
specifically to use accommodative policies since their economies are likely to be impacted by
increased economic activities (import and export) due to the fall in fuel prices among OPEC
countries. This implies that failure to implement accommodative policies will result into the
lowering of the value of their currencies. This, in return, will cause Euro to be less competitive as
compared to dollar. Correspondingly, such strategy would result into a possible economic crisis
as Euro will depreciate in value. Consequently, the confidence of the investors will be reduced
leading to a potential recession within the Euro zone.
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Work Cited
Spring Jake. IMF cuts global growth outlook, calls for accommodative policy. Published on Jan
20, 2015. Retrieved from:
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Figure 1: How the Fed operates in relation to the monetary theory

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