The Role Of Fiscal And Monetary Policies

This report will show an overview of the current state of the Australian economy and its management by the Federal government through examining economic indicators such as economic growth (GDP), unemployment, inflation and trade.

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?

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.

Booms, busts, recessions, and growth; all of the preceding terms are characteristics of a typical market economy. There are times when an economy can flourish spectacularly and there are times when it can fail miserably. Consequently, it is the responsibility of a nation’s central bank to manage these fluctuations through conducting effective monetary policy. The following paper will assume the perspective of the Reserve Bank of Australia (RBA) and critically analyze the past, present, and future of the Australian economy while considering specific sectors.

One of the most interesting facets of The Great Recession of 2008 is that it didn’t really begin in 2008. The fiscal and monetary policy that prompted what we know now as the Great Recession of 2008 really began in 2006 and 2007. What was happening then and why did it take so long for the nation to feel the recession? The answers to those questions explain a great deal about how the Federal Reserve Bank operates and how the different ideologies of economics affect our nation (Sumner, 2011).

How can monetary policy and fiscal policy greatly influence the US economy? Keynesian economics says, “A depressed economy is the result of inadequate spending .” According to Keynesian the government intervention can help a depressed economy through monetary policy and fiscal .The idea established by Keynes was that managing the economy is a government responsibility .

Fiscal policy is a system used for the economy that helps the fluctuation of financial goals by the alterations of government expenditures or taxes. There are two different fiscal policies used debating on the growth or decline of the economy. First is expansionary fiscal policy that is used to help boost the economy when it is in a decline like the recession our nation just witnessed along with prior years. Which in this case the government can decrease interest rates, and use tax incentives to help boost the financial system and private spending. Second is contractionary fiscal policy that is put into effect when the economy is at an incline and possible inflation is taking place. In which instead of decreasing interest rates they could raise

The deficit affects a University of Phoenix student because funding for financial aid could be compromised leading to more private loans. Loans become

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.

With the latest inflation result showing inflation to be around the mid band target of the 2-3% target, no immediate cash rate decisions need to be made to control inflation. The cash rate is closely related to the monetary policy. As the inflation target helps the RBA achieve its three objectives of monetary policy, and the cash rate ultimately influences the level of inflation in the economy, the cash rate and monetary policy can be seen to be closely related. The three objectives of monetary policy are; maintaining price stability, full employment and economic prosperity and welfare of the Australian people (Reserve Bank of Australia, 2013). The objectives of monetary policy will also be covered in this essay and how the current will

The three member governments in NAFTA have implemented contractionary fiscal policies to achieve a solid fiscal position. These policies include a tax reform to expand the revenue base and to offset the income loss from the declining tariff collection. There has been an increase in employment, output, and aggregate demand so contractionary fiscal policies have been established. Since free trade has lowered tax collection, the governments’ have had to entail tax increases which include personal and corporate taxes. These tax increases have restrained economic activity and allowed the circular flow of income in the economy to balance itself by reducing aggregate demand. This reduction in aggregate

Before we talk about ways to assess fiscal policy of an economy, I would like to describe what we mean by fiscal policies and why it is important for an economy. Fiscal policy is the use of government revenues and expenditure to influence growth of an economy. Fiscal policies that increase demand in an economy are called as expansionary policy whereas those which reduce demand are called as contractionary fiscal policies. These policies are most effective in a fixed exchange rate regime with perfect capital mobility while they are less effective if the exchange rate is flexible. These policies are used to tackle cyclicality, external account imbalances and inflationary problems. In the following sections, I will discuss describe various roles of fiscal policy, how the fiscal policies should be designed, how to assess its sustainability. The essay will end with a brief policy recommendation on fiscal policies which should be generally followed by the governments.

Monetary policy is the set of means implemented by a central bank to influence the economy by regulating its currency. Therefore, in every country, central banks play a key role in the economy of the country and implement a monetary policy. In the US, the Fed develops and implements monetary policies through certain indicators that will be discussed all through this paper focusing on the time period of 1997 to 1999. Those indicators are: economic growth as measured by real GDP, price level, interest rates, targets and goals of monetary policy and the Fed Chairman’s leadership in attaining them. 1997 marks the beginning of the Asian financial crisis that shook the global financial markets. However, “The U.S. economy remained largely insulated from the Asian crisis and the dollar held firm all through 1997-1999”( Laidi, p, 46).

The monetary policies of the government are not formulated to stabilize the economy and create trust; they are created to ensure that the regimes’ coffers are the main beneficiary, most of the times, the only beneficiary. That policy has created an almost dead Eritrean economy resulting in unemployment, poverty and frozen assets, the symptoms of bad management of money supply and the underlying problems associated with general monetary planning. Facing severe dilipadating consequences, the PFDJ is entangles in resolving the symptoms without attending to the root causes. It is with this in the background that we have to see the recent decision by the Eritrean government to change the old Nakfa bills with a new print.

Blejer and Cheasty (1988) hold the view that base on the the inflationary-financing model, a decrease of fiscal deficit will leads to reductions in inflation as deficits are assumed to be financed by the inflation tax. After that, more scholars e.g. Buiter (1987), Fischer (1980) and Pfajfar (2014) believe that fiscal deficits will lead to inflation. The reason is that the central government to finance the deficit can be carried out through taxation and borrowing and other non monetary and monetary form, but when the fiscal authorities implemented a series of actions that resulted in a sustained deficit, the central bank was forced to run its currency to the deficit and thus lead to inflation. When there is there is a huge fiscal deficit in a country within a certain period of time, if all or most of the deficit is made up by the central bank overdraft, it is bound to make the money supply more than economic growth and result the inflation. Therefore, the fiscal policy has an influence on the inflation to some extend.