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Fiscal policy and monetary policy, which is concerned with money, are the two most important components of a governments overall economic policy, and governments use them in an attempt to maintain economic growth, high employment, and low inflation. Fiscal policy is expansionary when taxation is reduced or public spending is increased that stimulate total spending in the economy. Expansionary policy might occur when a government feels its economy is not growing fast enough or unemployment is too high. The government can increase spending or cut taxes, and individuals and businesses will have more money.
When individuals or firms increase their purchases, they raise demand, creating jobs and generating more spending resulting in higher employment and a growing economy. Fiscal policy is contraction ary when taxation is increased or public spending is reduced in order to limit demand and slow the economy. A contraction ary fiscal policy reduces the amount of money in the economy available for purchasing goods. Tools and factors the government uses in managing its fiscal policies include the level of economic growth or unemployment likely in the future. Once these decisions are made, the government can decide how to raise revenue. Revenue is generated through a combination of different taxes.
Another important decision a government must make regarding fiscal policy is whether to run a budget deficit by spending more money than the government raises. Deficits can be financed in two ways, borrowing or printing more money. If the government borrows money, it will decrease the supply of money available in the economy for lending, and the cost of borrowing money, the interest rate, may rise. The overall economic effect of fiscal policy, especially when combined with the uncertainties of the forthcoming health reform package, has impaired a number of unconventional unknowns to the economies outlook, says the author about Alan Greenspan. Decisions on fiscal policy are influenced by, such as beliefs about the size of the role that governments should play in the economy, or the likely public reaction to a particular course of action. In the article by Henry Gonzalez, he argues that the American people are being left out of these monetary decisions because most of the people running the economy are not with average incomes.
The government is best known for the influence it has on interest rates by controlling the money supply. The Federal Reserve's open market operations are the most frequently used instrument of controlling the money supply. When the FOMC decides that the money supply is growing too slowly, the bank may purchase U. S. government securities which lets cash into the financial system, expanding the monetary base. This enables banks to create additional deposits, which constitute a major portion of the money supply.
If the money supply grows too fast, the FOMC will sell federal securities on the open market. This will reduce bank reserves and the ability of the banking system to create deposits. The FOMC is concerned with inflation expectations and price pressures, derailing the economy from its growth track. The open-market operation is the most flexible and the most used in monetary policy, you can also change the percentage of deposits that banks must maintain on reserve at the Federal Reserve banks.
When the required reserve ratio is raised, banks are unable to create as much money as they previously were able to because a larger portion of their assets must be held in reserve The Federal Reserve can make changes in the discount rate. When banks seek additional reserves by borrowing from the Reserve banks, a decline in the discount rate makes borrowing more expensive and bank reduce the demand for reserves. A discount rate change may, at times. The Federal Reserve also has a small role in regulating the stock market. It may lower or raise the margin requirement, which is the percentage of a stock price that must be provided in cash by someone who buys the stock on credit. If both policies work together to budget the economy then there should be no problem.
The government should focus on balancing our nations money, and keeping inflation down. I think it will be hard for monetary policy to work without fiscal policy and vice versa. The citizens are concerned with the value of their money and with the help on monetary and fiscal policy, the money we earn will go the extra mile. Bibliography: N/A
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