Fiscal and Monetary Policies

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Fiscal and Monetary Policies
Charles T. Sheridan
Student ID: 4290575
ECON 102
American Military University
Dr. John Theodore

Economies everywhere in the world have fluctuations, there Gross Domestic Product (GDP) is either growing (economic boom) or it is not producing enough and falls into a recession. In a recession, an economy’s GDP suffers two consecutive quarters of negative growth. Personal consumption, government spending and the amount a country imports and exports measure GDP (Amadeo, nd) while Rittenberg and Tregarthen state that personal consumption (C), gross private domestic investment (I), government purchases (G) and net exports (Xn) make up GDP (2009). The most recent recession in the U. S. economy was in
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However, government purchases will lead to a greater impact on the aggregate demand curve than a change in income taxes or transfers (Rittenberg and Tregarthen, 2009), The basic objectives of monetary policy is to “help promote national economic goals of economic growth, full employment, and price stability by influencing interest rates, the supply of money and credit” (Rittenberg and Tregarthen, 2009). Monetary policy has a cause-effect chain that can help expand money supplies by lowering interest rates to motivate consumers to borrow money (Rittenberg & Tregarthen, 2009). The extra money in the economy increases jobs. To help with monetary policy, the US government created the Federal Reserve (or the Fed). The Fed can raise or lower interest rates to help stimulate employment and help stabilize price (Rittenberg & Tregarthen, 2009). The Fed has three policy tools; setting the reserve requirement for banks (usually 10%), operating the discount window (where private banks can borrow money from the government to increase their reserves or reduce their liabilities), and conduct open-market operations (where the Feds buy bonds to create new reserves) (Rittenberg & Tregarthen, 2009). According to Rittenberg and Tregarthen, these purchases of bonds could possibly increase the money supply (2009). When private banks have extra reserves, they earn

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