Monetary and Fiscal Policy Both Are Used to Regulate the Economy Over Time - Economics Assignment Help

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Monetary and fiscal policy both are used to regulate the economy over time. Both policies also have a huge impact on finances. Typically monetary and fiscal policy are applied when the economy has slowed up and needs to be pushed forward, or when the growth of the economy has reached its peak and needs to be contained. Put simply, Fiscal policy is the government's decisions on economic spending and taxes. Monetary policy is just a way for the government to keep track of the amount of money and credit circulating within the economy.

The main overall goal of monetary and fiscal policy is typically to stabilize the positive growth of the economy and lower inflation. The objective is to keep our economy moving in the right direction so that we can avoid the experience of economic booms that could also lead to lengthy periods of time spent having low or negative growth and high levels of unemployment. When we have a stable economy this allows people to feel safe and secure in regards to their savings and consumption decisions. Intern this stability also allows corporations to strengthen their investment decisions and make their regular payments to their bond holders and make profit for their shareholders. However, stability does not come easy and there are several challenges when it comes to achieving this overall goal. Economies sometimes find themselves being hit with unexpected circumstances such as oil price jumps. When Breaking down the two policies and taking a deeper look we see that monetary policy consists of money supply management and interest rates all by central banks.

In efforts to stimulate a stable economy the banks will lower interest rates which allows borrowing money to be less expensive all the while increasing the money supply. Monetary policy is one of the most important tools in terms of addressing extremes within the business cycle. Monetary policy consists of all federal reserve actions that change the money supply in order to influence the economy. The overall goal of the policy is to control inflation and to reduce the event of an economic recession. The task of controlling the money supply is primarily done by the federal reserve. The federal reserve system, also known as the Fed, acts as a central bank for America and was established back in 1913. It consists of 12 regional banks, the federal reserve board of governors, and The federal open market committee. The main objective of the Fed is to promote full employment and control inflation.

The Fed takes part in four primary tasks. They supply our money, clear our checks, makes rules for banks, and most importantly they loan money to banks all over America and set the interest rates. The money loaned to the banks by the Fed then gets loaned out to several businesses and American people. Basically the lower the Fed sets the interest rate the more banks will feel obligated to borrow which means more money goes into the economy. With all that being said the Fed also establishes rules that control just how much money can circulate within the economy. One of these rules is the bank reserve requirement, which is the amount of money that the banks have ready at hand, in cash. They set that rule in place to prevent terrible events such as the great depression from happening again. Increasing the reserve requirement lowers the amount of money circulating within the economy and lowering the reserve requirement pushes more money into the economy. The Fed also establishes the interest rate banks have to charge when lending money to one another. If the rate is set too high fewer banks will borrow money from one another which will lead to them not lending out as much to businesses and individuals which results in there being less money circulating in the economy altogether.

Typically low interest rates are inclined to cause inflation. Inflation is a “general increase in prices and four in the purchasing value of money.” If there’s more money going around then that means there’s more to be spent which will make prices for things go up. Along with causing inflation, low rates lower unemployment. Another way the Fed controls the money supply is through open market operations. This is when the Fed buys and sells government debt in the form of Government bonds. Selling these bonds takes money out of the economy and buying them puts some more money in the economy. Overall monetary policy is used to promote growth and stability within the economy. Fiscal policy on the other hand allows the government to increase taxes and spend the money on improvements within the economy. Congress and the president make fiscal policy through the federal budget. The federal budget is the amount of money the government expects to get within a certain year and all authorizes the amount of money the government can spend that particular year. There are some things in the federal budget that have to be spent solely because they are made law by Congress. These are called mandatory spending. One example of mandatory spending is the interest payments on the federal debt. The government must pay their interest if they did not, no one would lend us any money. Things that also require mandatory spending are Social Security and medicare. These federal programs are for Americans who are no longer working.

They help those who have reached the age of retirement or have some sort of disability. The largest amount of government spending goes into defense and the second largest is healthcare and Medicaid. Fiscal policy is also often influenced by politics and voters which in turn could lead to poor decisions. Elderly people typically vote more frequently than that of the younger population so politicians are highly unlikely to vote for Financial cuts in Medicare and Social Security. Ultimately both policies are tools used by our government in efforts to help keep our economy growth stable along with low inflation rate and low unemployment rate.

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