Fiscal Vs. Monetary

1 Pages 306 Words

Complexity and debate emerge from the discussion of the fiscal and monetary policies and which best suits the needs of the American economy. The truth of the matter is that both are strong policies and aspects of both policies are applied to the economy. In order to delve further into the basis of this debate, it is important to review the fiscal policy, the monetary policy, and the current state of our economy.
The fiscal policy encompasses the decisions by the President and Congress, usually relating to taxation and government spending, with the goals of full employment, price stability, and economic growth. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. Or, the government could choose to increase government spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.
The monetary policy utlizes the regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation and stabilize currency. Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses....