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The use of fiscal and monetary policy
The use of fiscal and monetary policy
The use of fiscal and monetary policy
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The federal government influences economic activity in an attempt to maintain growth, employment, and price stability through fiscal policies. Our government influences economic activity by implementing a discretionary fiscal policy or a monetary policy. A discretionary fiscal policy is used to expand or contract economic growth. Monetary policies are by the Federal Reserve to expand or contract the economy’s wealth. Both discretionary and monetary policies affect the aggregate demand and the aggregate supply. The aggregate demand is the total demand for goods and services by consumers. The aggregate supply is the production of goods and services that are going to be sold. In macroeconomics, we look at buying and selling by the whole economy …show more content…
“The goal is an equilibrium level of national income that generates full employment with price stability”. (Amacher & Rate, 2012 pg. 9.2) During a recession, the government can use an expansionary fiscal policy to fill the recessionary gap, influencing the aggregate curve to the right. A recessionary gap happens when the economy is operating under full unemployment. When the economy is going through a recession; net exports, individual incomes, and investments will decrease affecting our GDP. President Barack Obama used an expansionary fiscal policy by enacting the Economics Stimulus Act during the Great Recession. If the government wants the opposite effect, it would implement a contractionary monetary policy, which slows down the economy. An economy is slowed down by reducing the money supply. The Federal Reserve contracts the money supply by selling bonds through market operations, meaning the public market. When bonds are sold, interest is collected by the central bank which has an effect on the price of goods and services (Inflation). The Federal Reserve can also affect the money supply by adjusting interest rates which will affect borrowing, consumption, and investments. If the Federal Reserve wants to expand the money supply it will purchase government bonds. This will cause interest rates to fall resulting in an increase in investments and borrowing
Federalism plays an integral part in the growth and development of the United States of America and is a key factor in determining the basis of power in this country. Clearly, the term federalism can be understood in many different ways pertaining to each person's view, but it can be more broadly defined in terms of the separation between the state and federal government. Thomas E. Patterson defines federalism as, “the division of sovereignty, or ultimate governing authority, between a national government and regional (that is, state) governments. Each directly governs the people and derives its authority from them” (Patterson 74). He then goes on to give a more basic definition with, “American Federalism is basically a system of divided powers” (Patterson 74). But federalism is more than just a word with a definition. It is hard wired into the constitution because the framers knew how important this division of power would be for the development of America and to ensure power would ultimately reside with the people.
The Federal Reserve is the central bank of the United States of America. The Federal Reserve has the ability to directly influence the economy. The purpose of the Federal Reserve is to create and maintain a stable monetary and financial policy, when this goal is achieved Americans are more likely to trust the government with their money. If Americans trust the government with their money, then the people will deposit their money into banks, which the banks will then lend out boosting the economy. Since the Federal Reserve is associated with the government, many citizens believe that monetary policy will emulate the current president’s views and opinions. While what the president does will affect the economy and consequently the Federal
The Federal Reserve System is the central bank which regulates and controls the monetary and banking system. Their primary focus is to regulate the health of the economy as a whole and implements monetary policy to help increase the money supply during a downturn, and restrict the money supply during periods of excessive growth. During periods when the economy faces high inflation, federal reserve will use contractionary monetary policy by decreasing money supply which in turn results in higher interest rates, lower investment spending, and lower consumer spending. In contrast, when the economy encounters a recession, federal reserve will utilize expansionary monetary policy by cutting interest rates or increasing the money supply to boost economic activity. During expansionary monetary policy, higher investment spending will raise income and higher consumer spending will help the economy. A tight (contractionary) monetary policy occurs when Federal reserve (central bank) raises the
"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve controls the three tools of monetary policy- open market operations, the discount rate, and reserve requirements.
The Classical economists believe that these are “temporary” changes that will correct themselves in the long run. They feel that an economy will always tend towards operating at its potential output (as given by the long-run aggregate supply curve. Nothing needs to be done by the government because normal market forces will serve to self-correct these issues. On the other hand, Keynesian economics argue that the gap between the lower and the potential levels of output is due to a change in aggregate demand. They argue that this gap can exist for a long time and that the gap can be pushed to close faster if the government enacts fiscal and monetary policies. There are differences in how each policy works to close the recessionary gap caused by a drop in aggregate
The U.S. government used to have a laissez faire policy with everything that had to do with the economy. Today the government is an important factor in the economy and helps keep the economy stable. There are many ways that the government watches over the economy; it passes laws that affect how business is done, protects workers and helps keep the middle class heathy, makes sure bussiness do not mislead consumers, and banned dangerous substances from being made in the U.S. There are many ways that the government othe United States affects the economy.
Aggregate demand is the total amount of goods and services that are demanded in an economy at different prices during a specific time period. Aggregate supply is the total supply of goods and services that are produced within an economy at different prices during a specific time period.
Everyone has their own political leaning and that leaning comes from one’s opinion about the Government. Peoples’ opinions are formed by what the parties say they will and will not do, the amounts they want spend and what they want to save. In macroeconomic terms, what the government spends is known as fiscal policy. Fiscal policy is the use of taxation and government spending for the purposes of stimulating or slowing down growth in an economy. Fiscal policy can be used for expansionary reasons, which is aimed at growing the economy and increasing employment, or contractionary which is intended to slow the growth of an economy. Expansionary fiscal policy features increased government spending and decreases in the tax rates as where contractionary policy focuses on lowering government spending and increasing tax rates. It must be understood that fiscal policy is meant to help the economy, although some negative results may arise.
In order to accurately and successfully forecast, investors analyze the economy in coordination with industry life cycles. The economies effect on an investment depends greatly on the businesses industry and life cycle. In addition, the government influences economic activity by controlling the supply of money. This economic control is accomplished by altering the reserve requirements and discount rates, through the monetary policy. As a result, the government can either incorporate an expansionary or contractionary monetary policy into the economy. An expansionary or loose monetary policy is sought to boost the economy by increasing money supply through decreasing the Federal Reserve. The expansionary act has been shown to
According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:
The appropriate role of government in the economy consists of six major functions of interventions in the markets economy. Governments provide the legal and social framework, maintain competition, provide public goods and services, national defense, income and social welfare, correct for externalities, and stabilize the economy. The government also provides polices that help support the functioning of markets and policies to correct situations when the market fails. As well as, guiding the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By applying the fiscal policy which adjusts spending and tax rates or monetary policy which manage the money supply and control the use of credit, it can slow down or speed up the economy's rate of growth in the process, affecting the level of prices and employment to increase or decrease.
The Aggregate Demand, described simply according to Wikipedia is, “In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services
Fiscal Policy consists of changes in government expenditures and/or taxes to achieve economic goals, such as low unemployment, price stability, and economic growth. There are two types of policies used by the government. These policies include expansionary and contractionary. There also the Keynesian economists as well the Classical economists. Each of these economists have different views on the fiscal policy. Some see the fiscal policy as ineffective and others effective. The government uses fiscal policies for various reasons. There are many scenarios in which countries such as Japan and even the US has use this policy. It may be used for unemployment rates or even to help a country that
These two policies use to try to shorten recessions. Fiscal policy has its initial impact in the goods markets, then monetary policy has its initial impact mainly in the assets markets, which both effect on both level of output and interest rates. (R. Dornbusch et al., 2008)
What does supply and demand mean? Demand indicates the quantity of a product or service that is aspired by