Fiscal and Monetary Policy

The Federal Reserve is currently implementing expansionary policy. When the Federal Reserve implements expansionary policy, their goal is to increase money supply, and in turn helping to grow the economy. During expansionary policy taxes are cut, and there is typically an increase in government spending. Expansionary policy is also implemented to decrease unemployment and increase inflation. I think that using expansionary policy could be a good thing for the economy of the United States. I think with the goals of decreasing unemployment, increasing money supply, increase government spending, and grow the economy this could be a good thing for the economy of the United States. I think that decreasing the unemployment rate is particularly

The Federal reserve needs to increase interest rates in the next year in order to reduce inflation. With low unemployment, the government is placing strain on the economy by lowering taxes and increasing spending. When the economy reaches its maximum output, prices increase while output remains the same. This could be what is happening now, with economic overheating on the horizon. However, the Federal Reserve could stifle this inflation by hiking interest rates over the next year. This would decrease the money supply and thus reduce inflation to its targeted level. It would also provide some leverage for the Fed to lower rates in the case of a recession.

What is expansionary monetary policy and when is the best time to employ it? What is quantitative easing and who does it benefit? How does this relate to the money supply? Why would a government ever employ contractionary monetary policy?

Another policy the government can use is the expansionary monetary policy, the expansionary monetary policy aim to shift aggregate demand to the right by lowering the interest rates, the lowering of the interest rates lowers the cost of borrowing for example using credit cards and decreases consumers marginal propensity to save which therefore encourages consumption. These lower interest rates also encourage firms to borrow and invest therefore further increasing aggregate demand in the economy. These lower interest rates will therefore increase aggregate demand shown in the graph below.

There are two separate ways that the economy can be regulated; the two options are fiscal and monetary policy. Both of these policies main goal is to get the economy to be in economic equilibrium. Economic Equilibrium is a condition or state in which economic forces are completely balanced and allows for optimal use of the economy. Then we are faced with the question of if the economy in in an inflationary gap or a recessionary gap. This paper is going to be based primarily around the actions the government should take to get our economy out of the recessionary gap and put it back into equilibrium. A recessionary gap occurs when the level of Real Gross Domestic Product is currently lower then it is at full-employment, which puts downward pressure on prices. This is when it comes time to decide on what actions we want to take, whether they are monetary or fiscal.

Monetary policy is used by the Fed to regulate the supply of money and credit in the economy. The purpose of monetary policy is to promote maximum employment, maintain the price of goods, and to control long-term interest rates to increase economic growth. Right now, monetary policy and fiscal policy are accommodating. At this point, the inflation rate is too low at 0.1 percent, which indicates some uncertainty in the economy. Inflation rates that are too low or too high may cause deflation. Deflation is the sustained decline in the average of all prices of goods and services (Miller, 2016, p.157). Deflation can also lead to recession due to limitation of spending. If prices never change or are predicted to drop, then consumers tend to wait to purchase products in order to receive the lowest price possible (The Associate Press, 2014). Lower inflation rates will impact the sale of blood glucose meters because people will delay spending disposable income on meters and strips.

First I am going to talk about the Fed’s “dual mandate”. What is the dual mandate? Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as, ”The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” (Chicago Fed 1). It if often called the "dual mandate" and guides the Fed's decision-making in conducting monetary policy. Now I am going to talk about the tools that the Fed use’s to achieve its goals. Some goals consist of a low unemployment rate, a stable price level, and economic growth. To help complete these goals the Fed uses certain tools to help fulfill them. An example would be a monetary policy that helps to close a recessionary gap and thus promotes full employment may accelerate inflation. A monetary policy that seeks to reduce inflation may increase unemployment and weaken economic growth. The Fed undertakes stimulative measures in response to a recessionary gap or even in response to the possibility of a growth shutdown to not allow the high inflation rates of the 1970s to occur again. Now I am going to explain what happens when the Fed pursues an expansionary or contractionary policy. “Expansionary policy, such as a purchase of government securities by the Fed, tends to push bond prices up and interest rates down, increasing investment and aggregate demand. Contractionary policy, such as a sale of government securities by the Fed, pushes bond prices down, interest rates up, investment down, and aggregate demand shifts to the left,” (Saylor

A Fiscal Policy is changes in government spending and taxation in order to achieve certain economic goals. Within Fiscal Policy, there is expansionary and contractionary and in an Expansionary Fiscal Policy there is increased in government spending, lower taxes and/or a combination of both. An Expansionary Fiscal Policy will stimulate production and reduce unemployment. By the federal government spending more money into the economy, businesses will be producing more, which more and more people will purchase. Businesses will expand as well, and will hire more workers, shrinking the unemployment rate to a degree. Since it is a combination of both increased government spending and decreased taxes, it will not overheat the economy. Monetary Policy on the other hand is changes to the money supply in order to achieve particular macroeconomic goals. This involves expansionary and contractionary and a Contractionary Monetary Policy is used to decrease the money supply when the growth in the economy is “too fast”. A Contractionary Monetary Policy will decrease investment and slow economic expansion. In other words, decrease inflation and GDP. We believe that our Contractionary Monetary Policy and Expansionary Fiscal Policy will counteract to find a balance. We are taking money from some government programs with Contractionary Monetary Policy, and using the Expansionary Fiscal Policy to thrust receding businesses into

We the government have to find a better way to spend the economic money better to improve our situation. Looking at the two expansionary which is fiscal and monetary policy to find out a way to find the economic. It is macroeconomic policy that pursues to enlarge the money supply to boost economic growth or combat inflation. One of the form is fiscal policy of expansionary policy, which comes in the method of tax cuts, discounts and increased government spending. Expansionary policies do come from central banks, which focus on cumulative the money supply in the economy. Now let look at the break down of expansionary policy which deal with the fiscal policy and monetary policy. The U.S. Federal Reserve pays expansionary policies whenever it

The money demand curve shifted upwards as a result of the higher output in the economy. However, the interest rate decreased in response to the lower real rate of return, therefore the money supply curve shifted to the right to reach the new equilibrium. Since, in this case, the central bank is using the price level targeting; the money supply must increase as following the macroeconomics theory. The expansion of money supply in the US is around 7.35% and this is comparatively higher than in all other countries.

Economists have been puzzled by the question of whether or not the Fed should begin its exit from expansionary monetary policy, primarily due to the reason that surrounds all policy change - there are benefits, and there are costs. The expansionary monetary policy essentially focuses on expanding the economy through increasing the GDP, and this is done through increasing output and employment through the lowering of interest rates. With the economy recovering slowly but surely, many economists believe it is in fact time for the Fed to exit from its expansionary monetary policy; however, there are underlying problems that still have yet to be addressed, and diverging from this policy will bury those problems deeper. The Fed

Fiscal policy is defined as the power that the federal government poses that enables it to impose taxes and also spend to achieve its goals in the economy. On the other hand, the monetary policy is maintaining the programs that try to increase the nation’s level of business through regulation the supply of money and credit. Currently, one of the most important roles of the federal government is to regulate and also ensure that there is stability in the economy. Through the use of both policies options, there is a goal of increasing and decreasing the level of business activity in the country. Governments in the world prefer to have a productive growing economy, but an economy can also be too productive where the government may enact policies to slow down the economic growth. This paper will discuss how both the monetary and fiscal policies are used in keeping the unemployment and inflation low while ensuring that the GDP is increasing.

In a situation where the country is in a period of high unemployment, interest rate sare at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year the Federal Reserve System would have to focus on monetary policy and the government would have to concentrate on fiscal policy. The Fed would thus need to install a stimulative monetary policy in that would better the economy's Gross Domestic Product in the future. Monetary policy would, however, have to be regulated in order to keep inflation in its current position. By cutting taxes, introducing stimulative fiscal policies, and increasing spending, economic growth is likely to occur in the short run.

Aggregate Demand is the total demand for goods and services within a market and consists of four main components; investment, consumption, government spending and net exports. These coincide directly with Keynesian’s economic fiscal policy. For boosting aggregate demand is the primary focus and supposed key to Keynesians fiscal policy solution. Since aggregate demand coincides directly with Keynesian’s economic policy, all of the policy’s long term problems become aggregate demand problems. With Keynes policy’s increase in government spending comes an initial boost in consumer spending which then boosts aggregate demand. Businesses increase supply and expand to meet this boosted demand. However once the fiscal stimulus package runs out, the once increased aggregate demand begins to decrease. The federal reserve begins to then print more money in order to compensate for the recently depleted fiscal package in order to maintain the aggregate demand levels. Additional printing of money lowers the value of the dollar thus causing inflation. As inflation rates rise in the economy consumers purchasing power decreases. With consumers purchasing power shrinking the

The introduction of expansionary monetary policy can have many impacts on an economy. One such impact is to stimulate consumer spending and levels of