Macroeconomic Policy : Monetary And Fiscal Policy

The fiscal policy is when the government changes its spending level and tax rates to monitor and influence their economy. The government will need to increase tax revenues to fund expenditure by increasing taxation by adjusting the income tax level.

Fiscal policy is budgetary plan such as changes in government spending and taxation to attain a specific economic objective. The discretionary fiscal policy encompasses fine-tuning government spending and taxes with the explicit goal of affecting the economy towards the future full employment of the workforce, increasing growth of the economy, and control of inflation. Examples of discretionary spending:

A contractionary fiscal policy occurs when government spending is reduced either through from an increase in tax revenues or reduction in public spending and is used in periods in which it seeks slow the growth of aggregate demand. While an Expansionary Fiscal Policy implies an increase in public spending through increases in public spending or lower tax revenues. You can apply expansionary fiscal policies when seeking to increase aggregate demand.

The fiscal policy is one form of the expansionary policy, which comes in many form, In addition to transfer payments and rebates, the two major example of expansionary fiscal policy are increasing government spending and tax cuts. The goal of an expansionary fiscal policy is to improve the growth of the economy level of a country. Also to help the government reduce unemployment, and increase consumer demand and avoid an economic collapse.

The government has two tools of expansionary fiscal policy which are expansionary and contractionary. The difference in the two tools is that by taking the expansionary route the government is opting to stimulate the economy. Expansionary is most often the path taken during times of high unemployment or during a recession. The government cuts taxes, rebates as well as government spending. Lastly, another option the government may choose to take is called the contractionary fiscal policy this means that the government decides to decrease the amount of money such as increasing taxes and reduce the amount of money the government is spending.

The nation's monetary policy is set up by the Federal Reserve in order to support the aims and objectives of better employment, stable prices and a suitable and logical long term interest rates. One of the main challenges that are faced by policy makers is the stress among the aims and objectives that can occur in the short term and the fact that information regarding the economy becomes delayed and can be inaccurate (Monetary).

Monetary policy focuses on keeping interest rates at a modest level, keeping prices steady, and keeping unemployment low. The Federal Open Market Committee is responsible for making the necessary monetary policy changes. These changes influence both the markets within the United States and the markets internationally. Currently, there is a lot of volatility within the markets, and there is a lot of speculation about if and when the Federal Reserve will raise interest rates. There is also speculation about whether a negative interest rate would work to get the economy back on target. Also, many worry about whether the current government debt level will continue, and with the number of people entering retirement increasing, whether there will be enough money coming in to cover the costs of the social programs, such as Social Security and Medicare.

The fiscal policies refer to the way in which the government affects those activities in the economy of a country. The major common fiscal policies that occur in the economy are the government expenditure and the level of taxation and they are usually advocated by the Central Bank of the country. The fiscal policies are a strategy that relates to the monetary policies that are used by the central bank of a country to control level of money supply in the country. The fiscal policies have a lot of influence on the money supply in the economy.

The Federal Reserve monetary policy exists to accomplish the goals of their dual mandate, maximizing employment and keeping prices stable. To accomplish these goals, monetary policy either changes the interest rate, namely the federal funds rate, or the money supply. Before carrying out these policies, the Fed considers economic data such as the trends in the CPI which describes the average level of inflation and various trends in the labor market . Through monetary policy, the Fed is also responsible for fighting recession. To do so, the Fed decreases interest rates but only to a certain point because nominal interest rates cannot go below zero. Therefore, it is important that the Fed return the federal funds rate back to its neutral rate before the next recession begins .

Central banks use a money based policy to minimize inflation. They have diverse ways that they do this. For example, the most common way is by raising the rates of the interest and selling securities through open operations in the market. The use of a multiplication of related money within a policy to lower unemployment and avoid the period where people and businesses make less money. The lower the rates of interest will only buy securities from different banks and cause liquidity to increase. In a perfect world, a money based policy should work beside with the national government's policy. However, it rarely works this way. That's because government leaders get re-elected for decreasing taxes and expanding spending. This would mean rewarding people that actually vote and obtain series of actions to reach a goal of contributors that result in a direct, but in an upsetting way. As a result, a policy like a Monetary Policy is usually involves expansion related topics. However, to avoid a great inflation, the policy must be serving to severely limit or control

Fiscal Policy involves the Government changing the levels of Taxation and Government Spending in order to influence AD (Aggregate Demand) and therefore the level of economic activity.

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

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.

Monetary policy rules are a fundamental part of the central bank models and are often refined to maximize economic welfare, specific to that country. Monetary policy rules are a methodical response of monetary policy events in the economy. Essentially, it can be thought of as a numeric equation, which determines the appropriate level for the central bank’s policy instrument to be a function of one or more economic variables that describe the state of the economy. It is imperative that economies model the reaction of their monetary authorities to changes in their respective economic conditions; this equation is essentially a “reaction function.” A reaction function utilizes its instruments to stabilize inflation and output

Monetary policy rules are a fundamental part of the central bank models and are often refined to maximize economic welfare, specific to that country. Monetary policy rules are a methodical response of monetary policy events in the economy. Essentially, it can be thought of as a numeric equation, which determines the appropriate level for the central bank’s policy instrument to be a function of one or more economic variables that describe the state of the economy. It is imperative that economies model the reaction of their monetary authorities to changes in their respective economic conditions; this equation is essentially a “reaction function.” A reaction function utilizes its instruments to stabilize inflation and output fluctuations in response to demand or supply shocks. In a macroeconomic environment, the policy rules a Central bank develops is essential and thus numerous monetary policy rules have been discussed throughout economic literature.