Fiscal Policy vs. Monetary Policy Essay

This policy is results in faster results to speed up the economy for the short term. Fiscal Policy is later used to develop a plan of yearly actions and is a long term way to stabilize the economy. The next idea to stabilize the economy is a theory called monetarism which is the belief that if government did not interfere with the market economy that employment would be high and inflation low. Followers believe the government is the reason of downturns such as the recent recession.

To be more precise in the way the monetary policy works, it is under three implements that define its functions: open market operations, changes in the discount rate, and changes in the required reserve ratio. These are the functions that provide the Federal Reserves (the Fed) the ability to change the money supply in our economy. It is a matter of actions taken to maintain our country in the best way possible and, of course, stability comes with a price. With things like supporting our troops in other countries, like Iraq and Afghanistan, a cut in tax rates, and increases in overall spending, it adds up to where we have spent more than we have collected in revenue (Fix the

Government activities have a powerful effect on the US economy in stabilization and growth which is the most important are. The federal government guides the pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. They do so by adjusting spending and fiscal policy- tax rates- or managing money supply and controlling use of monetary policy-credits. It slows down or speeds up the economy’s rate of growth, which affects the level of prices and employment. After the Great Depression in the 1930’s, recession (high unemployment) was

The first to be discussed is the discount rate is the interest rate charged by the Federal Reserve to banks for short term loan basis. The increase and decrease of the money supply is determined by the discount rate. Discount rate would be used is a bank needed twenty million dollars, the money would be borrowed from the United States treasury but has to be paid back at a interest rate of three percent. This monetary tool would be used with inflation if the expected inflation increases so will the discount rate and vice versus at the same rate remaining equivalent. During periods of time with high unemployment rate the discount rate is lowered in order to counteract high unemployment and to prevent the possibility of a recession. Secondly, there is the ratio reserve. Ratio reserve is the amount of money that has to be kept at a bank on reserve; this amount can be adjusted to back outstanding deposits. Ration reserve creates the marginal money supply at any given moment due to the Fed raising or lowering the reserve requirements. Although it is rarely used to control the money supply it is a tool that can be used. An example of how it would be used would be if Will comes in and deposit one thousand dollars and the reserve amount is ten percent, of that one thousand dollars one hundred will go to the reserve ratio. Allowing the other ninety percent to be used as a money supply for loans and etc. In the case of unemployment and high inflation the Fed has to lower the reserve ratio in order to decrease the unemployment rate and inflation because if the reserve ratio is lower then the economy and the money supply is moving more vividly. Lastly is the open market operations. Open market operations is the act of buying and selling Treasury securities’ between the Fed and certain selected banks in the open market, it is directed by the FOMC. Open market operations would be considered

As the term indicates, monetary policy involves actions to influence financial conditions in order to reach specific economical goals. Short-term interest rate is the variable which is used to indirectly influence demand which consequently impacts the economy. A typical example can be observed where the lowering of interest rates make borrowing less expensive and motivates consumer spending because they can get a better deal on a loan. The extra spending stimulates economic growth. If there exists too much money in the economy demand increases comparatively faster than supply, which serves to create product shortage and eventually inflation. The opposite occurs if there isn’t sufficient money in the economy. People

Thus, critics argue that monetary policy is a more effective tool to fight recessions. Christina and David Romer demonstrated that fiscal policy rarely reacts with the immediacy necessary to enact change during a trough in economic activity. Romer finds that there has been no significance to discretionary fiscal policy during troughs, while monetary policy has a seemingly significant role during historical recessions. John Taylor agrees, stating that even in the face of the lower bound of zero on interest rates, additional measures such as quantitiative easing would prove effective countercyclical policy. Ultimately, both economists reach the conclusion that there is no significance to discretionary fiscal policy during a recession, instead determining that monetary policy is the more effective tool.

The economic meaning of a recession is that the gross Domestic Product (GDP) has declined for two or more consecutive quarters. Unemployment rises, housing falls, stocks fall and the economy is in trouble. Whenever the government sees that the economy is entering a recession it is important for it to act. The U.S acted in two ways during the Great recession of 2008 through fiscal and monetary policies. Renaud Fillieule identifies that “ Monetary and credit expansions have been the main tools used by the U.S. government and central bank to try and recover economically from the Great Recession of 2008” (Fillieule r, Pg. 99 2016). These Keynesian policies are debatable among economist, none the less they were implemented and put the U.S on the road to recovery.

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

“Real plans for real people.” This was the coined theme for the Bush campaign back in September. As far as I can see with his tax cut plan in doesn’t involve “real people”. It may just depend on your definition of the term, but the “real people” of America are the middle class, hard working families. Bush’s tax plan is now said to be $1.6 trillion over a ten year period of time. Most of this money will go to the upper brackets, the “better off”. Granted they do pay the most money, but then when you think about it, why do they need the cut? Can they not afford to pay their taxes?

Monetary policy is the process of the monetary authorities of a country primarily controlling the supply of money available, often targeting a certain rate of interest for the main purpose of promoting economic growth and stability. The Main Official goals usually include relatively stable prices with low unemployment. Discretionary monetary policy on the other hand, uses the Federal Reserve to increase the money supply; this is made possible by manipulating the four tools we learned about. The Federal Reserve uses open market operations when they have to purchase the

This effect the nation prices, employment and outputs. The fiscal policy instrument is a budget set by congress and the president for the federal government. Some fiscal policies do not need government intervention because the transfer and tax policy will automatically cause the correct fiscal policy actions. This is called the automatic fiscal stabilizers. When the economy is experiencing a recession, the decline in unemployment and income will be automatically stabilized by our tax and transfer policy. This works by reducing households tax rates and allowing people who are unemployed to qualify for unemployment insurance and government assistance. When there is a rapid growth in the economy the automatic stabilizer will slow the growth by increasing the tax rate and reducing government spending on transfers. The automatic stabilizers do not always work during trouble times in the economy in macroeconomics. To deal with these problems the government officials can use the discretionary fiscal policy instrument. The discretionary fiscal policy has two types called the expansionary and contractionary fiscal

Monetary policy has become more common now then how it used to be. The Federal Reserve has what is commonly referred to as a "dual mandate", to achieve maximum employment, in practice, around 5% unemployment, and stable prices 2-3% inflation. In this role, it lends to eligible banks at the so-called discount rate, which in turn influences the Federal funds rate (the rate at which banks lend to each other) and interest rates on everything from savings accounts to student loans, mortgages and corporate bonds In conclusion, Economic policies are the solutions that governments bring to the macroeconomic problem. Yet good policies are hard to find. A bad policy may be worse than nothing at all. Supply-side economic have been long recognized the importance of an economy's productive capacity, it's stock of labour and capital. Demand-side economic s has supported the government for the longest time ever, and has also increased many prices. Monetary policy has influenced the Federal

Fiscal policy is the government use of taxing and spending to meet economic goals. The tools of fiscal policy are taxing and spending, and the United States government controls it.

The term monetary policy refers to the actions that the Federal Reserve undertakes to influence the amount of money and credit in the U.S. economy. Changes to the amount of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy.The Federal Open Market Committee formulates the monetary policy,

Monetary policy affects the aggregate demand by altering the supply or cost of money. One of which is the alteration of the rate of interest. By reducing the interest rate, it encourages consumers and businesses to borrow and spend or invest instead of saving their money. As a result, the supply of money increases. When there is more money, it