Economic Policy And Monetary Policy

2426 Words Apr 3rd, 2016 10 Pages
There are two types of economic policies to control aggregate demand in a market economy. These two types are known as fiscal policy and monetary policy. Fiscal policy is when the government changes their taxing amounts and their spending, for the purpose of expanding or contracting aggregate demand. Monetary policy is the changes in interests rates and money supply to expand or contract the same demand, but it is under control of our central bank. When it comes to fiscal policy, the government does two very different things to promote economic growth, depending on what is going on in the economy at a certain time. For example, if our economy is in a recession and is failing, this policy would involve lowering taxes and reducing spending. This promotes growth because it lowers what the people have to pay, so they pocket more money, and it also reduces the government’s spending so there is less money out in regulation. This helps their countries economy to grow out of the defect it is in. But on the other hand, when the country is in an expansion, this policy requires higher taxes, but also reduces spending. It is said that in an expansion, a budget surplus is required. This means that the government has to charge more taxes because they need to take in more money, but they also must lower their spending because they need to keep more of their money. When the economy is in a severe recession, like the case has been in 1981-1982, discretionary fiscal policy was needed. In this…
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