Fiscal Policy vs Monetary Policy

Fiscal Policy The word fiscal simply means “of or relating to government revenue or taxes” Fiscal Policy is the governments ability to increase or decrease taxes and increase or decrease spending to influence the economy Ultimately, the federal government’s fiscal policy is the responsibility of Congress Most direct and effective means of influencing the economy

Monetary Policy The word monetary simply means “of or relating to money or currency” Monetary policy is the manipulation of the amount of currency in circulation and the availability of credit in the economy as dictated by a central bank In the case of the United States, the central bank that is responsible for our monetary policy is the Federal Reserve (the Fed) Monetary policy is a more indirect way of managing the economy and also has unintended consequences

Common Goals Ideally, both our fiscal and monetary policies work in unison to accomplish these three goals: 1. Economic Growth- A nations wealth is often measured by Gross Domestic Product (GDP) which simply means, the total monetary value of all the goods and services produced by a nation in any given year. So, a nations economic growth can be monitored by following its GDP from year to year -Last year U.S. GDP was 17.4 trillion, anything more than that would be considered growth

Common Goals (cont) 2. Full Employment: A nation’s unemployment rate is a good indicator of the health of a nations' economy. Generally, the lower the unemployment rate, the healthier the economy 3.Price Stability: A slow rate of inflation is always the goal of both fiscal and monetary policy as it is a sign of a growing economy. However, high inflation and any deflation (except for perhaps after a time of excessive inflation) is a bad thing! ex: If you went to the store in January to buy a light bulb and it cost $3.42 it would not be abnormal for that same light bulb to cost $3.47 in November. But if It was $5.00 or $2.00 that would not be a sign of a healthy economy

So how do they achieve these goals? Fiscal Policy: There are two main theories when it comes to fiscal policy. Fiscal Conservatism and Keynesian economics (after John Maynard Keynes) Fiscal conservatism takes the common sense approach. If your economy is not doing well, you cut back (cut the budget) if your economy is doing well, you have more money to spend Keynesian economics says the exact opposite, if your economy is not doing well, you Monetary policy: The Federal Reserve uses alternative and less direct ways to influence the economy: If the economy is down you put more money into circulation and lower interest rates so that people can more easily borrow money When the economy is doing well and expanding too quickly, that is often a sign of over speculation and often causes dramatic inflation. To combat this, the Federal Reserve will often raise interest rates to make it harder to borrow money and take money out of circulation to slow down inflation