Fiscal and Monetary Policy

Fiscal and Monetary Policy Monetary and fiscal policies are the actions taken by the governments to conduct their macroeconomic policy. They always come together, but define different events. Monetary policy defines the actions of central banks aimed at achieving government’s macroeconomic goals, namely full employment, stability of prices, and economic growth. Fiscal policy is the taxation mechanism of how a government earns to the budget and what it spends it on. In the United States, the Federal Reserve System controls monetary policy, whilst the Congress and the Administration maintain the fiscal policy. There are some tools used by the Federal Reserve System to reach the macroeconomic objectives, namely federal funds rate and purchase of securities. The federal funds rate is the bank percent for the short-term loans they grant each other. It helps to control the money supply on the market. The ability to control the short-term loans rate leads to the power in controlling the long-term rates and assets price on the market. This leads to the changes in the households’ and enterprises’ spending and savings. Thus, the market is adjusted to the current economic situation, and the issues are settled in a less painful for the nation way. However, the real market economy the United States claims to conduct should be free of the government control and interference. The purchase of the long-term securities is the additional stimulus for the economy as it helps the loans interest rates become lower. With this tool, the government obtains the assets that may be sold, and the funds earned may be transferred to the state budget. Moreover, this is not taken into account when defining the budget deficit or the state’s debt. The fiscal policy tools are more direct than the monetary ones. Fiscal policy deals with the taxes taken off the population, which composes the income part of the budget and the government spending, which composes the expenses part. This correlation

References: Horton, M., El-Ganainy, A. (2012). Fiscal Policy: Taking and Giving Away, International Monetary Fund, Retrieved from: http://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm Laopodis, N. (2004). Fiscal Policy, Monetary Policy, and the Stock Market, School of Business Fairfield University, Retrieved from: http://economics.soc.uoc.gr/macro/11conf/docs/FiscalPolicy&StockMarket.pdf What is the difference between monetary policy and fiscal policy, and how are they related? (2012) Board of the Governors of the Federal Reserve System, Retrieved from: http://www.federalreserve.gov/faqs/money_12855.htm