• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Monetary and Fiscal Policy.

Extracts from this document...

Introduction

Monetary and Fiscal Policy The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary. The monetary policy is the act of regulating the money supply by the Federal Reserve Board of Governors, currently headed by Alan Greenspan. One of the main responsibilities of the Federal Reserve System is to regulate the money supply so as to keep production, prices, and employment stable. The "Fed" has three tools to manipulate the money supply. They are the reserve requirement, open market operations, and the discount rate. The most powerful tool available is the reserve requirement. The reserve requirement is the percentage of money that the bank is not allowed to loan out. If it is lowered, banks are required to keep less money, and so more money is put out into circulation (theoretically). ...read more.

Middle

The monetary policy is a good way to influence the money supply, but it does have its weaknesses. One weakness is that tight money policy works better that loose money policy. Tight money works on bringing money in to stop circulation, but for loose policy to really work, people have to want loans and want to spend money. Another problem is monetary velocity. The number of times per year a dollar changes hands for goods and services is completely independent of the money supply, and can sometimes contradict the efforts of the Fed. The benefits of the monetary system are that it can be enacted immediately with quick results. There are no delays from congress. Second, the Fed uses partisan politics, and so has no ties to any political party, but acts in the best interests of the U.S. Economy. The second way to influence the money supply lies in the hands of the government with the Fiscal Policy. The fiscal policy consists of two main tools. ...read more.

Conclusion

Because a tax cut can take a year to really take effect, the economy could revive from the recession and the new unnecessary tax cut could cause inflation. Politics are another problem. Unlike the monetary policy run by the partisan Fed, the fiscal policy is initiated by the government, and so politics play a key role in the policy. When the concerns of the government are viewed, it becomes obvious that a balanced budget is not the primary objective, anyway. The fiscal policy can also be used as a campaign tactic. If tax cuts are initiated and government spending is increased, then the president is more likely to be re-elected, but has first to deal with the inflation his tactic caused. Monetary and fiscal policies are what helps keep the nation's economy stable. With them it is possible to control demand for services and goods and the ability to pay for them. It is possible to manipulate the money in private hands without directly affecting them. The policies are simply a myriad of tools used to prevent a long period where there is high unemployment, inflation, and prices, along with low wages and investment. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. the limitations of Fiscal Policy

    The causes of large deficits in 1980s and 1990s are large net foreign liabilities (Gruen and Sayegh, 2005a)and the low rate of savings in Australia then (Collins, 1994). Government increased the National saving by increasing the tax rate in 1990s and it shows an improvement in current account deficit during the period of 1995-1998.

  2. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    Many different circumstances can lead to cost push inflation, the most common of these used to be wages being driven up excessive amounts by aggressive and powerful trade unions, this has not been such an issue recently due to the Thatcherite reforms in the 1980's.

  1. Free essay

    Which policy is better - monetary, fiscal or supply side?

    The fact that the CPI has kept inflation low over the past 15 years has also effected unemployment. The CPI has also provided a stable environment for jobs and growth, which shows that monetary policy is effective in keeping "low unemployment" - one of the macroeconomic objectives.

  2. The UK fiscal policy.

    Result and analysis Taxation Taxation, according to tutor2u.net, can be defined as "any compulsory levy from individuals, households and firms to central or local government. The British economy imposes a wide range of taxes on people." (www.tutor2u.net/economics/content/ttopics/fiscalpolicy/taxation1.htm) The direct tax The direct tax can be defined as the tax imposed on the income of individuals and profits of companies.

  1. Fiscal and Monetary Policies

    It is an indicator of general business activity, economic growth and a good index for the economy. The most widely followed measure of economic growth is Real GDP, which adjusts GDP to remove the effects of inflation. The anemic annual GDP rate of growth of 1.5% above over the past two years is well below market expectations.

  2. Using Fiscal Policy to Improve Employment.

    In addition, the government has created public service employment programs for the unemployed. The Manpower Development and Training Act of 1962 authorized a three-year program aimed at retraining workers displaced by new technology. The bill did not exclude employed workers from benefiting, however, and it authorized a training allowance for unemployed participants.

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    The low growth rate also means that the Bank of England will be less than likely to raise interest rates in months to come. Output in the service sector, which makes up the bulk of UK plc, was flat during this time period, whilst manufacturing output was sagged.

  2. Fiscal policy is a macroeconomic policy.

    From the multiplier, we can work out such an increase in spend is requiring by the government: k = 1/ (1-MPC) = 1/0.25 = 4 ?Y= k x ?G we need Y rise by 4000 (i.e. ?Y= 4000) 4000 = 4 x ?G ?G = 1000 Therefore, increasing aggregate demand by 1000 (G)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work