Monetary policy consists of adjusting the money supply the amount of money in circulation and setting the prime rate the interest rate that banks pay to each other on loans. Fiscal policy uses government taxation, spending and borrowing to influence the economy.
Fiscal Policy Fiscal Policy refers to the use of the spending levels and tax rates to influence the economy.
The governing bodies use combinations of both these policies to achieve the desired economic goals. Thus, the essential tools of fiscal policy are taxing and spending. But as the recession deepened into the Great Depression and no correction occurred, economists realized that a revision in theory would be necessary.
John Maynard Keynes developed Keynesian Theory, which called for government intervention to correct economic instability. At the same time, he recommended, it should decrease taxes in order to give households more disposable income with which they can buy more products.
Through both methods of fiscal policy, the increase in aggregate demand stimulates firms to increase production, hire workers, and increase household incomes to enable them to buy more. Keynes advocated the opposite positions during times of rapid inflation.
It varies from country to country. The individuals who have control over the budget are referred to as the fiscal authority. In the United States, it is held by the executive and legislative branches; whereas in Europe, there are varied models with the power, mostly, lying in the hands of the prime minister or the finance minister and the parliament with the degree of power of either bodies changing through time.
Discretionary Fiscal Policy and Automatic Stabilizers The government exercises fiscal policy to prevent economic fluctuations from taking place. When actions Eco202 fiscal and monetary policy undertaken to minimize economic fluctuations, it is known as discretionary fiscal policy.
Discretionary fiscal policy is employed when an increase in unemployment and inflation is observed. They are taxes and transfers that automatically change with changes in economic conditions in a way that dampens economic cycles.
For example, at times of economic downturns, the amount of money spent on food stamps automatically rises as more people apply for it or the rules are eased. The additional spending generated by the food stamps helps to soften the downturn for the individuals receiving the help, and also benefits the businesses and employees where the money is spent.
The objective of expansionary fiscal policy is to reduce unemployment. However, it can also cause some inflation.
On the other hand, the objective of contractionary fiscal policy is to reduce inflation. However, it can also trigger some unemployment. By contrast, fiscal policy is often considered contractionary or tight if it reduces demand via lower spending.
Effects of Fiscal Policy The objectives of fiscal policy vary with duration and economy of application. In the short term, governments may focus on macroeconomic stabilization with aims of stimulating an ailing economy, combating rising inflation, or helping reduce external vulnerabilities.
In the longer term, the aim may be to foster sustainable growth or reduce poverty with actions on the supply side to improve infrastructure or education. Although these objectives are common among countries, their relative importance differs depending on the country circumstances.
In the short term, priorities may reflect the business cycle or response to a natural disaster while in the longer term; the catalysts can be development levels, demographics, or resource endowments.
Although they do have a negative effect on private investment, a varied effect on housing prices, lead to a quick fall in stock prices and depreciation of the real effective exchange rate. Reduced taxes have the inverse outcomes as they have positive although lagged effects on GDP and private investment; have a positive effect on both housing and stock prices; and lead to appreciation of the real effective exchange rate.
However, putting them into practice is quite a difficult task because of various reasons. Thus, changes in expenditure generally must come from the small part of the budget that includes discretionary spending.
This gives the government less leeway for increasing or lowering spending. Another inhibiting factor is working with estimations.
When lawmakers put fiscal policies in place, they base their decisions partly on the past behaviors of individuals. It is risky to assume that people will, for example, respond the same way to a tax cut in the future as they have in the past. Although changes in fiscal policy affect the economy, changes take time.
By the time the policy takes effect, the economy might be moving in the opposite direction. In these cases, fiscal policy would only add to the new trend, instead of correcting the original problem.
The pressure that people in authority experience of pleasing the citizens hinders fiscal policy as well. It requires a coordinated effort from multiple pockets of the government which is very difficult to make happen.Eco Fiscal and Monetary Policy Essay ECO 1.
Explicitly define both fiscal and monetary policy. 2. Compare and contrast the way Keynes and Friedman approach the economy. Monetary and Fiscal Policy Monetary policy is the plan to expand or contract the money supply in order to influence the cost and availability of credit. ECO Week 5 Practice: Fiscal and Monetary Policy Quiz.
Complete the Week 5 Fiscal and Monetary Policy Quiz in McGraw-Hill Connect® by Day 5. These are randomized questions. Note: You have unlimited attempts available to complete practice .
• Analyze new monetary policy actions undertaken by the U. • Determine the effects of government intervention and fiscal and monetary policy actions for their impact on the economy SNHU Eco milestone 1 2, 3 and final paper.
Tutorial # Posted On: 08/25/ AM. Posted By: msmonopoly/5. American Fiscal Policy in the 's Herschel I. Grossman. NBER Working Paper No.
Issued in May NBER Program(s):Economic Fluctuations and Growth, Monetary Economics This essay analyzes current fiscal policy in the United States within an historical context. However, if expansionary fiscal policy is accompanied by an expansionary monetary policy in the form of an increase in money supply from M 0 to M 1, the LM .
Fiscal policy is an economic policy by which a government adjust its level of spending in order to monitor and influence a nation’s economy. Fiscal policy refers how the government use the budget to affect economic activity, allocation of resources and the .