Fiscal Policy And Monetary Policy

The United States Federal Reserve has been conducting open market operations in the financial markets since 2008 in order to drive down interest rates and promote economic growth following the 2007-08 financial crisis. The subsequent recession, dubbed the Great Recession, destroyed $19 trillion in household wealth and nearly 9 million jobs. The highly controversial quantitative easing (QE) program, which refers to the process of introducing new money into the money supply, has been effective in promoting US recovery over the past six years.

When the Federal government has to find ways to regain any money lost they lean on the expansionary Fiscal policy and the monetary policy to regain money into the economy. Whether, a change in taxes or even government spending. Even to the three major tools of the expansionary monetary policy to focus on. In the first part of this paper, I will discuss the expansionary fiscal policy and how the Federal government was involved and the changes that needed to be made to taxes, government spending. The second part of this paper, I will discuss the monetary policy and the tools the Federal Reserve used when under this policy. The expansionary fiscal policy was out to kick start the economy, and the expansionary monetary policy was out to change interest rate, and influence money supply. When discussing these two policies you have to think about one aspect when will it ever stop? Will a policy always have to be part of the economy to help the government one way or another?

economy from a recession, and it was the lowest rate level in nearly forty years. Money was available to American consumers who were drivers to two-thirds of the U.S. economy to borrow it easily and cheaply to spend in order to stimulate the U.S. economy. (CNBC, 2014) A former Fed economist, David Jones stated, “Only the Fed can create money out of thin air in these crises when everyone panics and liquidity dries up”. According to David, It was a remarkably stable financial situation compare to how big the September 11 crisis was. (Egan, 2013) The Fed loaned more than $45 billion to many financial institutions and it provided a quick stability to the U.S. economy. The Fed’s action was a key to dampen the potential financial crisis followed by the September 11 attacks on the U.S. centers of power, and economic market stability went back close prior to September 11 by the end of September. (Federalreserveeducation.org, 2014) Then how might the Fed action have affected the foreign flow of funds into the U.S. and affected the value of the dollar?

The term monetary policy refers to what the Federal Reserve, the nation’s central bank, does to influence the amount of money and credit in the U.S economy. The main goals of this policy are to achieve or maintain full employment, as well as, a high rate of economic growth, and to stabilize prices and wages. By enforcing an effective monetary policy, the Federal Reserve System can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment. Up until the early 20th century experts felt that monetary policy had little use in influencing the economy. After WWII inflationary trends caused governments to ratify measures that decreased inflation by restricting growth in the money supply.

The 2008 Great Recession helped in restoring economic growth and lowered unemployment. Both fiscal and monetary policies are related ways use to increase the aggregate demand and aggregate supply. So, a shift in the aggregate demand curve to the right is expansionary fiscal policy meaning government spending has to exceed (2012). The G- component aggregate demand help to spend, allowing the C- component of aggregate demand to increase. On the other hand, the monetary policy promotes spending, investments, and lending increasing aggregate demand. During the downturn, the systems concentrate on growing demand total while the supply strategy looked for long-term growth in productivity and efficiency (Pettinger, 2012).

Monetary policy consists of specific changes in the money supply to influence interest rates which in return adjusts the level of spending in the economy. The goal of the policy is to achieve and maintain price stability, full employment, and economic growth. The regulation of the money supply and interest rates are controlled by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation. Monetary policy is only one of the two ways the government can affect the economy. By altering the effective cost of money, the Federal Reserve can ultimately change the amount of money that is spent by consumers and businesses.

Congress has handed over the responsibility for monetary to the Federal Reserve, also known as the Fed, but retains oversight responsibilities in order to ensure that the Federal Reserve adheres to the statutory mandate of stable prices, moderate long-term rates of interest, as well as, maximum employment (Labonte, 2014). The responsibilities of the Fed as the country’s central bank are classified into four: monetary policy, supervision of particular types of banks and financial institutions for soundness and safety, provision of emergency liquidity through the function of the lender of last resort, and the provision of services of the payment system to financial institutions, as well as, the government (Labonte, 2014). The monetary role of the Federal Reserve necessitates aggregate demand management. The Federal Reserve defines monetary policy as the measures it undertakes in order to influence the cost and availability of credit and money to enhance the objectives mandated by Congress, which is maximum sustainable employment and a stable price level (Appelbaum, 2014). Since the expectations of businesses as capital goods purchasers and households as consumers exert an essential influence on the main section of spending in America, and the expectations are influenced in essential ways by the Federal Reserve’s actions, a wider definition would involve the policies, directives, forecasts of the economy, statements, and other actions by the Federal Reserve, particularly those

The 2007 financial crisis had been called the great recession because it was so severe. The government especially the Federal Reserve took unprecedented action to stabilize the market. The Federal Reserve is the central bank of the United State established in 1913. Hubbard and O’Brien state that The Federal Reserve is task with monetary policy which is the management of the money supply and interest rate to pursue macroeconomic policy objectives (11).

There are two ways the economy can be assisted in growing and sustaining itself. First through fiscal policy from the national governments help of changing taxes and spending, then Monetary policy, the managing of money. The two are supposed to work together to help create a better economy but, at times fall short. Leaders in the government for the most part have a top priority to stay in their position, with that in mind they tend to give the people the immediate satisfaction they want which is increased spending and reduced taxes. With this approach fiscal policy is considered expansionary, restrictive monetary policy is what is needed to stop inflation to counteract this.

There are two powerful tools that the government and the Federal Reserve use to direct our economy in the right direction- Fiscal Policy and Monetary Policy. When these tools are used appropriately, they can fuel the economy and slow it down when it is growing too fast. Fiscal policy is concerned with government spending and collecting taxes. With the fiscal policy, you can increase government spending and decrease taxes to increase disposable income for people as well as corporations. Monetary Policy on the other hand refers to the supply of money which is controlled by factors such as interest rates and reserve requirements for banks. These methods are applicable in a market economy, but not in a communist or social economy.

During the financial crisis, the Fed’s monetary policy and the Treasury’s fiscal policy were both expansionary and thus essentially complementary to each other. Both policies aimed at stimulating the economic activities and stabilizing the credit market and the entire financial system. During the crisis, the inflation rate dropped significantly as the commodity prices plummeted, which freed the Fed from worrying about inflation risk. The foreign investors poured their money into the U.S. Treasury, allowing the U.S. government to borrow at extremely low interest rates. The various actions taken by the Treasury and the Fed served to work together to address the problems which were critical to save the U.S. financial system from collapse and to end the most severe recession since the Great Depression.

The United States has had several economical downfalls within the last century, many which have been aggravated by the change of the money supply. As if there’s much to learn from America’s economy, having the highest Gross Domestic Product (GDP) per Capita is an aid towards any future economic collapse. With as much purchasing and supplying power that the United States has, it would be wiser to remain within the policies closest relating to stimulating a demand economy. By doing so the government is ensuring that there is enough need before purchasing supplies for said goods or services. With the United States free market, there is little that the Federal Government could do to have a say in monetary policy besides setting a fixed interest

A monetary policy was also implemented to fight the Great Recessions, Traditionally the monetary policy could not be implemented since the Federal Reserve has a Zero Bound Problem. This meant that the interest rates were already set at 0 by the central bank and could not be lowered any further since a negative figure would lead to a non-investment (Hetzel, 2012). The Federal reserve instead developed a monetary policy by the name Quantitative Easing to try and reduce the effects of the recession. QE was implemented by the federal reserve by buying assets, for example, they bought cooperate bonds from banks for cash in order to add more supply of money in the economy. In a normal case, the federal government would purchase the bonds from individual to increase money but during a recession the no private bonds available for purchase. Therefore, the federal government is forced to buy other assets.

Monetary policy uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending . “The object of monetary policy is to influence the nation’s economic performance, as measured by inflation”, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.