Monetary And Fiscal Policy Essay Examples

Monetary and Fiscal Policy Essay examples
Monetary and fiscal policy and their applications to the third world countries with a huge informal sector
This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to the economy. This includes the role of the
government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and
their performance when applied to the third world countries with a huge informal sector.
Monetary Policy
Monetary policy is the mechanism of a country's monetary authority (usually the central bank) taking up measures to regulate the supply of money and
the rates of interest. It involves controlling money in the economy to promote economic...show more content...
This involves buying or selling financial instruments like bonds in exchange of money to be deposited with the central bank. By selling the financial
instruments, the central bank mops up the cash in circulation. On the other hand, selling injects money thus increasing the supply of money (Bernanke
2006).
Interest rates
By increasing or reducing the nominal interest rates, the money supply is either increased or reduced. When the rate goes up, people are not able to
borrow, thus the money does not enter into circulation. But when the rates go down, people borrow in big numbers therefore increasing the money
supply. So the monetary authority just needs to adjust the interest rates either upwards or downwards, and in–direct results will be reflected on the
money on circulation. Discount window lending
This is the situation where the commercial banks and other lending institutions borrow from the central bank at lower interest rates compared to how
they will lend. This gives the institution a chance to vary credit conditions depending on the central bank lending rates. If the central bank raises its
lending rates, then the other lending institutions will have to raise their rates too, thus discouraging the public from borrowing. But if the central bank
lowers its rate, then commercial banks and other institutions will be forced to lower their rates too. This will encourage the
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Monetary Policy Rules And Monetary Policies
Monetary policy rules are a fundamental part of the central bank models and are often refined to maximize economic welfare, specific to that country.
Monetary policy rules are a methodical response of monetary policy events in the economy. Essentially, it can be thought of as a numeric equation,
which determines the appropriate level for the central bank's policy instrument to be a function of one or more economic variables that describe the
state of the economy. It is imperative that economies model the reaction of their monetary authorities to changes in their respective economic
conditions; this equation is essentially a "reaction function." A reaction function utilizes its instruments to stabilizeinflation and output fluctuations in
response to demand or supply shocks. In a macroeconomic environment, the policy rules a Central bank develops is essential and thus numerous
monetary policy rules have been discussed throughout economic literature.
Monetary policy rules in Canada differ from the United States, as the Canadian monetary policy has an inflation–control target and the flexible
exchange rate. On the other hand, the US rate is the interest rate that a bank charges another for borrowing money overnight. The rates determined
through the monetary policy rules determine many factors of the economy and globally as well.
II. Canada vs. United Sates: Output Gap & Inflation Comparisons (2000–2014)
The data for these graphs were retrieved through the International

Monetary Policy Paper
Monetary Policy Paper "Monetary Policy is the most significant function of the Fed; it is probably the most–used policy in macroeconomics"
(Colander, 2004, p. 661). This paper will discuss and elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and
concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal Reserve, and the stated direction of recent
monetary policy will also be discussed.
"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit
availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank,...show more content...
Federal government consumption and investment the part of spending that is counted in GDP rose more than 7 percent in real terms in 2002.
(Government spending on items such as interest payments and transfers are not counted in GDP because they do not constitute a direct purchase of
final production). Reflecting an unchanged stance of monetary policy over most of last year, short–term market interest rates moved little until early
November, when the FOMC lowered the target federal funds rate 1/2 percentage point, and other short–term interest rates followed suit. The Federal
Reserves concerns are many; because of the economic diversity of our country. In November 2002, the fed reduced the targeted federal funds rate
50 basis points, to 1.25 percent. The policy easing allowed the Committee to return to an assessment that the risks to its goals were balanced. The
Fed has inflation expectations well contained, and the additional monetary stimulus seemed to offer worthwhile insurance against the threat of
persistent economic weakness and substantial declines in inflation from already low levels. Federal Reserve policymakers believe the most
probable outcome for this year to be a pickup in the pace of economic expansion. The central tendency of the real GDP forecasts made by the
members of the Board of Governors and the Federal Reserve Bank presidents is 3.25 percent to 3.5 percent, measured as the change between the final
quarter of 2002 and

Essay on Economy: The Role of Monetary Policy
Monetary Policy
Does monetary policy cause more problems than solutions? The control of the amount of money in circulation is of general essence to the economy in
various ways. The Federal Reserve System (the Fed) is approved to develop a monetary policy to control the rate of inflation, regulate the conduct of
business and to control the economy through a steady economic growth by the government of the U.S.A. According to Taylor (2011), "
Monetary policy
is that involves altering the quantity of money and thus affecting the level of interest rates and the extent of borrowing" (p.310). Also, there are two
different monetary policy which are expansionary monetary policy and contractionary monetary policy. The Fed normally applies three...show more
content...
Basically, it involves the increase in the supply of money in circulation thereby resulting in the lowering of interest rates.
Also, according to Potter's article, monetary policy also solves the problem of inflation (2013). Inflation refers to the depreciation in the value of a
particular currency. In the U.S.A., the Fed is charged with the responsibility of developing monetary policy which ensures that the value of the US
dollar in the international market keeps its perfect high. If the value falls, the cost of basic merchandise rises, making the standards of living to a very
high level. The Fed normally adopts the contractionary monetary policy which is "a monetary policy that reduces the supply of money and loans; also
called a 'tight' monetary policy" (Taylor, 2011, p.316). Basically, it involves the reduction of liquidity in the market. When the amount of money in
circulation is reduced, the bank lending rates go high with the net effect of an improvement in value of the currency.
Also, Potter (2013) claims that contractionary monetary policies slow down the rate of inflation of monetary policies accepted by the Fed have argued
that the move slows down production. Contractionary monetary policies have been blamed for recession if the limits are not well checked. When the
amount of money in the circulation is reduced, the engine of the economy has limited capacity. As a result, the demand for goods

Monetary Policy Essay
According to the simulation, there are three key economic tools used by the Federal Reserve to control the monetary policy. 1. Spread between the
Discount Rate and the Federal Funds Rate 2. Required Reserve Ratio 3. Open Market Operations
These economic tools influence the money supply in the following ways:
1.Difference in Discount Rate and Federal Funds Rate:
Banks are able to borrow from the Fed if the discount rate charged by the Fed is lower than the federal funds rate charged by other banks. As the
discount rate is decreased, banks shift their source of borrowing from other banks to the Fed. As they do so, the total amount of money in the system
is increased. If the spread is positive, banks will always borrow from other...show more content...
2.Inflation Rate:
While increasing the money supply is a good sign for the GDP, it is not the same for inflation. With the increase, the nominal value of money stays the
same, but the increase in money continues to chase the same quantity of goods and servicesВ…thus the real value of money is decreased. The result is
prices go up.
3.Unemployment Rate:
The unemployment rate reacts to the GDP. When investment and spending increase, demand and employment opportunities tend to go up due to labor
requirements for production of goods and services. This increase causes a decrease in the unemployment figures. When money is reduced in the
system, causing a decrease in the GDP, the employment opportunities and demand for workforce will fall increasing the unemployment rates.
Monetary Policy
U.S. monetary policy affects all kinds of economic decisions people make in this country as well as others. Whether it is to get a new loan for a
brand new car, that new home for upstart family or to begin a new entrepreneur company, loans are a part of everyday life. Loans are not the only
items driving the economic decisions, take for instance the money one puts in the bank or in bonds, some may even look to invest in the stock market.
Because the U.S. is the largest economy in the world, its monetary policy can significantly affect financial endeavors in other countries.
The purpose of

Monetary Policy
Monetary Policy at the Local and Federal Level & Impact in a Recession
Monetary policy, in the short run, has an impact toward the demand for goods and services. That is, monetary policy has a distinct influence over
inflation and other economic factors, not only at the federal level, but at the state and citywide levels. Monetary policy will influence the financial
conditions facing firms and households in the environment, even at the micro level. Thus, employees who produce goods and services are impacted, as
is the demand for those goods and services. When monetary policy imposes changes, the financial conditions that affect the economic activity in
specific sectors are influenced as well. The federal government, through fiscal policies...show more content...
Of course, this is felt throughout the entire economy, at the state and local levels, and in macroeconomics at the federal level. Individuals are
dramatically impacted when stocks rise or fall. The focus is on when stocks fall and there is a crippling impact on the individuals and their financial
worth. During a recession, the stock market has likely fallen, where one may notice the impact throughout the local environment as individuals struggle
to compensate for their losses. Therefore, one is likely to see monetary policy in order to make adjustments and fix what is out of alignment in the
economic

Monetary Policy
The tools used by the Federal Reserve to control the money supply
There are three tools that the Federal Reserve (The Fed) uses to control the money supply. The first tool is the Spread between the Discount Rate
(DR) and the Federal Funds Rate (FFR). This spread determines if banks will be more inclined to borrow from the Fed or from other banks. The
Second tool the Fed uses to control the money supply is the Required Reserve Ratio (RRR). The Fed mandates a percentage (ratio) of deposits that
bank are required to hold in reserves and not lend out. The Third tool the Fed uses to control the money supply is Open Market Operations (OMO).
OMO includes Treasury Bills (T–bills), bonds, securities, and other instruments sold to...show more content...
When financial instruments, like T–bills or securities are sold this decreases the money supply because the Fed accepts money in return for a promise
to pay. The same is true in reverse. When financial instruments are bought back by the Fed this increases the money supply because the Fed pays out
hard currency in exchange for accepting securities.
Monetary Policy
Monetary policy is the process by which governments and central banks manipulate the quantity of money in the economy to achieve certain
macroeconomic and political objectives. The targets are usually: – economic growth, changes in the rate of inflation, higher level of employment, and
adjustment of the exchange rate. Monetary policy is categorized into two types: Contractionary and expansionary. Contractionary (or "tight") monetary
policy aims to reduce the amount of money circulating through the economy, and reduce short–term economic growth in exchange for higher
(hoped–for) long–term growth. Expansionary ("loose") policy, on the other hand aims to increase the money supply and increase short–term economic
activity at the expense of long–term economic activity (bestwaytoinvest, 2007). Macroeconomic factors There are many Macroeconomic indicators that
are affected by Monetary Policy. A few that will be focused on are Real Gross Domestic Product (GDP), Inflation, Unemployment Rate, and Interest
rates. In order to understand how these for

Introduction
Fiscal and monetary policies focus on quickly returning the economy to sustainable, healthy growth. Any type of fiscal relief package will boost
consumer and business spending and can augment the nation's long–term growth potential. Expansionary monetary policy can stimulate growth and
provide insurance against the possibility of deflation. This paper will present information on four topics: (1) tools used by the Federal Reserve to
control the money supply, (2) how these tools influence the money supply and in turn affect macroeconomic factors? (3) how money is created? (4)
recommended monetary policy combinations that best achieve a balance between economic growth, low inflation, and a reasonable...show more
content...
Tools used by the Federal Reserve to control money supply?
On The Federal Reserve Web site"The major tool the Fed uses to affect the supply of reserves in the banking system is open market operationsВ—that
is, the Fed buys and sells government securities on the open market. These operations are conducted by the Federal Reserve Bank of New York. When
the Fed wants the funds rate to rise, it does the reverse, that is, it sells government securities. The Fed receives payment in reserves from banks, which
lowers the supply of reserves in the banking system, and the funds rate rises" (http://www.frbsf.org/publications/economics/letter/2004
/el2004–01.html#subhead2).
Another tool the Fed uses to affect the supply of reserves The Fed can't control inflation or influence output and employment directly; instead, it affects
them indirectly, mainly by raising or lowering a short–term interest rate called the "federal funds" rate. Most often, it does this through open market
operations in the market for bank reserves, known as the federal funds market (http://www.frbsf.org/publications/economics/letter/2004
/el2004–01.html#subhead2).
The Fed can also use discount interest rate decreases as way of controlling money: The Fed can lower the discount rate and lower the costs for banks
holding low excess reserves which will lower the excess reserve rate. If the Fed lowers the

Monetary Policy in the United States
Abstract
The role of government in the American economy goes past just being a regulator for specific industries. There are two main tools for achieving these
objectives: fiscal policy and monetary policy. The Federal Reserve sets the nation's monetary policy to promote the objectives of maximum
employment, stable prices, and moderate long–term interest rates.
Monetary Policy in the United States
Monetary policy is the government or central bank process of managing money supply to achieve specific goals (wikipedia.org). The United States
monetary policy affects all kinds of economic and financial decisions people make in this country. Whether to buy a car, or build a house,...show more
content...
Monetary policy objective is to influence the performance of the economy, in inflation, exchange rate with other currencies and unemployment.
Monetary authority has the ability to alter the interest rate and the money supply, with affecting the demand of the economy. TheFederal Reserve
System influences demand mainly by altering the (raising and lowering) short–term interest rates, to achieve policy goals. These goals are listed in the
1977 amendment to the Federal Reserve Act. With inflation increasingly devastating the economy, the central bank abruptly tightened monetary policy
beginning in 1979. This policy successfully slowed the growth of the money supply, but it helped trigger sharp recessions in 1980 and 1981–1982. The
inflation rate did come down, however, and by the middle of the decade the Federal Reserve was again able to pursue a cautiously expansionary
policy. Interest rates, however, stayed relatively high, as the federal government had to borrow heavily to finance its budget deficit. Rates slowly came
down, too, as the deficit narrowed and ultimately disappeared in the 1990s. The growing importance of monetary policy and the diminishing role
played by fiscal policy in economic stabilization efforts may reflect both political and economic realities. Fighting inflation requires government to take
unpopular actions

Essay on Monetary Policy
Introduction
Monetary policy is among the many tools used by a national government to manipulate its financial system. Monetary policy refers to the method used
by the financial authority of any country to control the supply and availability of money (Woelfel, 1994). It is often targeted at interest rates to achieve
lay down objectives directed towards economic growth and stability (Woelfel, 1994). Monetary policy rests on the link between interest rates in an
economy, that is, the relationship between interest rates and the total money supply. It employs a variety of methods to control outcomes like inflation,
economic growth, currency exchange rates and unemployment.
Monetary policy can either be expansionary policy in which case...show more content...
One of these approaches is quantitative easing (QE). Quantitative easing is a technique used by central banks to boost money supply in an economy
when interest rates are close to or at zero thus cannot be reduced further (Woelfel, 1994). To increase the supply of money under such conditions, the
central bank may be forced to buy government assets/securities like government bonds, mortgage–backed securities or government debt from banks
thus increase their surplus revenue hence raise or stabilize prices of such securities and consequently reduce interest rates in the long term.
With this insight in mind, the remaining part of this essay seeks to critically examine the methods of implementing monetary policy when interest rates
are close to or at zero.
Monetary Policy Options at the Zero Bound
Interest rates have the lowest bound at zero mark. When this limit is reached, serious problems occur in designing appropriate monetary policy
approaches since interest rates can never be set below this mark. Countries like Japan, United States and Switzerland have faced this challenge in the
recent past thus calling for alternative approaches to monetary policy when the nominal interestrate is close or at zero.
Conventional monetary policy methods are always channeled towards lowering interest rates to stabilize inflation and other outputs. This is however
impossible in situations whereby the interest rates are already close to or zero calling for

Monetary Policy
Monetary Policy
The Economy is the backbone to society. There are many factors that operate in, and govern our society's economical structure. Factors such as scarcity
and choice, opportunity cost, marginal analysis, microeconomics, macroeconomics, factors of production, production possibilities, law of increasing
opportunity cost, economic systems, circular flow model, money, and economic costs and profits all contribute to what is known as the economy.
These properties as well as a few others, work together to influence the economy. Microeconomics and Macroeconomics are two major components.
Both of these are broken down into several different components that dictate societal norms and views. "Microeconomics...show more content...
Usually this goal is "macroeconomic stability" – low unemployment, low inflation, economic growth, and a balance of external payments. Monetary
policy is usually administered by a Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the United States."
(Federal Reserve Bank of San Francisco, 2007).
Monetary policy effects the GDP inflation. "Between 1996 and 2000, real GDP in the United States expanded briskly and the price level rose only
slowly. The economy experienced neither significant unemployment nor inflation. Some observes felt that the United States had entered a "new ear" in
which business cycle was dead. But that wishful thinking came to an end in March 2001, when the economy entered its ninth recession since 1950.
Since 1970, real GDP has declined in the United States in five periods: 1973–1975, 1980, 1981–1982, 1990–1991 and
2001." (McConnell & Brue, 2004).
Unemployment Rates
The unemployment rate is also affected by monetary policy. "Unemployment that is above the natural rate involves great economic and social costs."
(McConnell & Brue, 2004). GDP GAP and OKun's Law. McConnell and Brue define this as "when the economy fails to create enough jobs for all who
are able and willing to work, potential production of goods and services

{draw:rect} {draw:g} {draw:frame} Monetary Policy Paper Objective I choose to research and write on the topic of monetary policy. My two main
sources of information were www.federalreserve.gov and www.frsbf.org. From my research I would define monetary policy as the macroeconomic act
of keeping the country financially stable. According to www.frsbf.org "The object ofmonetary policy is to influence the performance of the economy as
reflected in such factors as inflation, economic output, and employment. It works by affecting demand across the economy–that is, people's and firms'
willingness to spend on goods and services". The information that I located suggested that the main issues that monetary policy deals with are inflation
...show more content...
Others say that the apex bank would maintain status quo on both the short–term rates as well as cash reserve ratio (CRR) and adopt a wait and watch
stance. However, with the US Federal Reserve slashing its rates by 0.75% last week, some bankers feel that the RBI might consider a 0.25–0.50% cut
in interest rates and a 0.25% reduction in the CRR margin.Following the Fed rate cut, the possibility of huge capital inflows into India has increased
and the RBI might take steps to narrow the interest rate differential between the two countries, Indian Banks' Association's chief executive H N Sinor
said. "The RBI may send out a signal by reducing either the reverse repo or the repo rate by 0.25–0.50% to moderate capital flows," Sinor said. The
repo and reverse repo rates currently stand at 7.75 % and 6% respectively. While a hike in key rates might temper capital inflows, a cut in CRR would
release some capital, which could be used by banks for increasing credit offtake and thereby spurring growth, which has slowed down in some sectors
including manufacturing, textiles and consumer durables. "High interest rates have hit growth in certain sectors. Whether the RBI does it this
month–end or a little later remains to be seen," private sector Yes Bank chief Rana Kapoor said. Dena Bank chairman P L Gairola feels that one could
expect a

Monetary Policy in the United States Essay
Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and
stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of
monetary policy tools to control one or both of these. The Federal Reserve went into action in response to the 2008 recession by rapidly reducing
interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The
results of the rate changes caused what is called "zero bound", this reduced the effectiveness of monetary policy with the near non–existence of interest
rates. In...show more content...
It changed its unemployment target to 7 percent, while keeping its targeted inflation rate at 2 percent .
On September 18, 2013 the Federal Reserve reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a
considerable time after the asset purchase program ends and the economic recovery strengthens. In addition, the committee agreed to continue its
monthly $85 billion purchase of Treasury and mortgage–backed securities as long as the unemployment rate remains above 6.5 percent. Inflation
between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer–run goal and
longer–term inflation expectations continue to be well anchored .
Bank Regulatory Reform
The regulatory reform process is currently moving from policymaking to the implementation phase. The implications of regulatory reform for banks
has never been greater, and the ability to navigate the new environment will require strong processes that integrate regulatory compliance and changes
to the business model. Planning has never been more important as reaction to each regulation could be very costly.
The Dodd–Frank Wall Street Reform and Consumer Protection Act were signed into federal law on July 21, 2010 by President Obama. These laws
were passed in response to the financial crisis of 2008 with intent

Monetary Policy
Monetary policy has some basic goals: to promote "maximum" sustainable output and employment and to promote "stable"
prices. The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the
availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve
responsibility for setting monetary policy.
The Fed can not control inflation or influence output and employment directly; instead, it affects them indirectly, mainly by raising or lowering a
short–term interest rate called the "federal funds" rate. The Federal Reserve has certain tools at its...show more content...
Using these tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks
and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal
Reserve to other depository institutions overnight. The point of implementing policy through raising or lowering interest rates is to affect people's and
firms' demand for goods and services. Changes in the federal funds rate trigger a chain of events that affect other short–term interest rates, foreign
exchange rates, long–term interest rates, the amount of money and credit, and, ultimately, a range of economic variables. This shows how policy
actions affect real interest rates, which in turn affect demand and ultimately output, employment, and inflation.
Monetary policy can be quickly altered and can affect money supply and investments very fast thus making speed and flexibility one of its strength.
Members of the Feds board are appointed a 14 year term. This isolates them from lobbying so therefore no political pressure to contend with. The tight
monetary policy helped the economy succeed from 1980 thru to 1990 by bringing down the inflation rate.
Monetary policy is not all strengths there are weaknesses also associated

CHAPTER ONE 1.INTRODUCTION 1.1Background of the Study Governments make use of different macroeconomic policy instruments such as
fiscal and monetary policies to stabilize the macro–economy and brig about growth to their respective countries. Yet there are debates on the efficiency
of each of these instruments. Some economists argue that fiscal and monetary policies are ineffective in all countries while the other group argue that
they are important policy tools, though their effectiveness depends on conditions in the economy. Fiscal policy is one of the commonly used
instruments for achieving the goals of growth and stability in the economy through enforcing monitoring mechanisms. The components of fiscal policy
include: government expenditure, tax, and public debt (Permechand 1983). The contradicting arguments about effectiveness of fiscal policy
amendments or government involvement still continue in these sections too. Public expenditure refers to the expenditure incurred by the government
for the maintenance of various public good and to promote the welfare of the society as a whole. It is the main instrument used by governments
especially in developing countries to promote economic growth which is an essential component for sustainable development (MOFED 2010).
However, composition of government expenditure has been attracting the attention of economists due to its effects on the level of growth (Sharma B.
2012). Economic growth is expected to bring about a better

Essay about Fiscal and Monetary Policy
The difference between fiscal and monetary policy lies within the different tools wield, and aspects of the economy they influence. Fiscal policy
generally deals with different sorts of taxes to manage earnings and spending in the population, and how the government benefits from these
interactions. Monetary policy, on the other hand, affects the base value and amount of money in circulation directly, as opposed to simply leveling off
amounts from the population to put into federal spending.
There are, primarily, two tools utilizing taxes that are used in fiscal policy to influence the economy. The first of these– Revenue tools– are the taxes
collected by the government, both directly and indirectly. We experience direct taxes in the...show more content...
The tools of monetary policy have to do with the currency in circulation and its value. One of the primary tools implemented by the government is open
market purchases and sales– buying and selling different shares to increase or decrease the amount of money in the monetary base. These are usually
permanent changes. In case there is a need for a temporary devaluation or increase in monetary amount and value, the government implements repos–
the temporary buying or selling of government securities with the intention of the original owner buying back the share. When there is a dearth of
money in local banks, a central bank offers them a loan (the discount rate)– another monetary policy tool– which bails them out.
Fiscal and Monetary policy both have their advantages and disadvantages. According to James Tobin, two of the main goals of monetary policy is to
ensure the stability of the value of money (ideally, ensuring the rate of inflation is as close to zero as possible) and to provide jobs to the entirety of
the population. However, Tobin claims these often conflict. "Full employment means that everyone... who is productive enough to be worth the
prevailing real wage and wants a job at that wage is employed. In these circumstances more

The Two Types Of Monetary Policies
Monetary policies
Monetary policies are strategies used by the central bank, financial regulatory committee of currency board to regulate the amount of money supply in
the economy. There are two types of monetary policies. These are expansionary monetary policies and contractionary monetary policies.
Expansionary monetary policies entails increasing money supply in the economy. Expansionary monetary policies affect macroeconomic variables
differently. It leads to reduction of unemployment, increases consumer expenditure, leads to economic growth and development and increase private
sector borrowing. Increase in private sector borrowing increases the capacity to invest and create more employment opportunities.
Contractionary monetary policies on the other hand aims at reducing the amount of money in supply in the economy. Contractionary monetary policy
slows economic growth and development, unemployment increase, it reduces inflation and it can discourage investors from borrowing. Contraction
monetary policies are used in most instances to curb growth of inflation rate. This is achieved by raising the interest rates. However, contraction
monetary policies can lead to recession in the economy.
Analysis and results
Aggregate demand and aggregate supply model
Aggregate demand and aggregate supply forms an economic model which incorporates the macroeconomic variables and explains the behavior of the
economy. Aggregate demand and aggregate supply determines the

Fiscal Policy vs. Monetary Policy Essay
Fiscal Policy vs. Monetary Policy
With America in recovery from the attacks on our freedom and our economy, many wonder if we will return to phase one (expansion) and how long it
will take to reach phase two (recession) again. The Keynesian Theorists of America believe that the government should actively pursue Monetary
policies (enacted by the Federal Reserve Bank) and Fiscal policies (enacted by Congress) to reach adjustments to price, employment, and growth levels.
In our full market economy, we must use these economic policies to control aggregate demand. When these policies are used to stimulate the economy
during a recession, it is said that the government is pursuing expansionary economic policies....show more content...
Instead, the government uses Nondiscretionary Fiscal Policy (Automatic Stabilizers). This fiscal policy is built into the structure of federal taxes and
spending. Some examples of this are the progressive income tax (the major source of federal revenue) and the welfare systems, which both act to
increase AD in recessions.
Monetary policy is under the control of the Federal Reserve System and is completely discretionary. It is the changes in interest rates and money
supply to expand or contract aggregate demand. In a recession, the Fed will lower interest rates and increase the money supply. The Federal Reserve
System's control over the money supply is the key Mechanism of monetary policy. They use 3 monetary policy tools– Reserve Requirements, Discount
Rates/Interest Rates, and Open Market Operations. The reserve requirement is the percentage of bank deposits a bank must hold in reserves and
cannot loan out. By raising or lowering the reserve requirements, the Fed controls the amount of loanable funds. The interest rate is the amount the
FED charges private banks, so they can meet the reserve requirements. The prime rate is currently set at 5%. If the Interest rate is low, the banks will
borrow more money from the FED and the money supply will increase. Interest rates have been above average for the past 20 years, but are currently
considered low. Open Market Operations is the most effective and most used

Contractionary Monetary Policy
Monetary policy is the management of the quantity of a nation's money supply by the nation's central bank. An expansionary monetary is one that
increases the money supply. An increase in the money supply will lower interest rates, which increases borrowing for spending. The increased spending
increases aggregate demand and the equilibrium level of output. Contractionary monetary policy raises the interest through reductions in the money
supply. The higher interest rate lowers spending, which lowers equilibrium income.

Monetary And Fiscal Policy Essay Examples

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