Fiscal and monetary policy

Fiscal and monetary policy

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Fiscal policy

Fiscal policy is government spending policies which involve the use of government taxes and spending to control the economy. The government controls the economy by changing the levels of government spending and taxation to regulate aggregate demand and the level of activities of the country’s economy. There are three main components used to measure fiscal policy, and they include the government spending, the level and composition of taxation and borrowing. The decision of the government to implement fiscal policy must pass through the legislature and the executive. The executive implements the laws defined by the legislature to administer fiscal policy during the recession periods. Expansionary fiscal policy applies when the government wants to stimulate the economy during its anticipation of or in business cycle contractions. The aggregate demand and aggregate expenditure need to rise by increasing the spending of the government of transfer payments and government purchases and decreasing taxes. The result will be larger budget deficit or smaller budget surplus to the government (Hansen 83).

Monetary policy

Monetary policy involves the central bank which determines the rate and the size of the money supply in a given country, by controlling the interest rates. The central bank and the commercial banks determine the amount of money supplied in the country’s economy. The committee of the central bank implements the monetary policy by changing the interest rate of the money to be issued to commercial banks so as to influence the amount of money kept in the bank’s reserves, controlling the rate of inflation and subsequent economic growth. The contractionary monetary policy should be implemented by selling some of its treasury securities through open market operations by increasing the requirements of the bank reserves and raising discount rate charged to the commercial banks for reserve loans. As a result, the money supply will decrease while interest rates will increase, decreasing the aggregate expenditures and aggregate production. The main concern of the policy is to reduce inflationary pressures (Todd A. Knoop 212).Works Cited

Hansen Bent. (2014). the Economic Theory of Fiscal Policy. Abingdon: Routledge, 2014. Print.

Knoop Todd A. (2009). Recessions and Depressions: Understanding Business Cycles:

Understanding Business Cycles. California: ABC-CLIO, 2009. Print.