Monetary and Fiscal policy and The Great Recession

The goal of monetary and fiscal policy is to create and maintain a growing stable economy. While both policies deal with manipulating the economy, which entity uses them and the tools they use are what differentiate them from each other. When it comes to monetary and fiscal policy, the details and timing matter because they can save a country, or they can destroy a country.

Monetary policy is about controlling the supply of money in attempts to create stable growth in a country. Monetary policy is usually classified one of two ways, expansionary policy and contractionary policy. The goal of expansionary policy is increasing the total supply of money rapidly. The goal of contractionary policy is to increase total money supply slowly or shrink the total money supply. While expansionary policies are aimed to help unemployment, contractionary policy is aimed to stop deterioration of the values of assets.

Monetary policy is used by the Federal Reserve also known as the “Fed”. The Fed was created at the end of 1913 after the financial panic in 1907. It was created as a last resort to lend banks money if their customers should panic and withdraw all of their money quicker than the bank can replenish it. The Fed is mainly governed by the Federal Reserve Board of Governors. The individuals on the board are appointed by the President of the United States and the Senate confirms them. They serve 14 year terms. The Fed do more than control monetary policy, they also supervise operations the U.S banking system. The Fed is not a branch of government so it is independent for the most part. They still have to give a yearly report to the Speaker of the House but they are not immediately influenced by any branches of government.

The Fed has ...

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...ation. The government can use taxation to either raise or lower the revenue coming in. With this they can control if the money coming in is balances with the budget, exceeds the budget or is not enough for the budget creating a debt. The second tool the government uses is spending. The government spends money just like everyone else does. They can increase it to allow the budget to be balanced, or in debt. If they decrease government spending they could allow the budget to be exceeded. The last way the government influences the economy using fiscal policy is by debt. The government can increase fiscal deficit by issuing bonds. This allows the government to borrow money from the public that it if the interest is too large, it can’t pay back. Which could cause a collapse in the long run but the government hopes to be able to pay the money back before that happens.