Fiscal and Monetary Policies

Topics: Monetary policy, Inflation, Economics Pages: 3 (900 words) Published: February 25, 2013
Fiscal and Monetary Policies
Charles T. Sheridan
Student ID: 4290575
ECON 102
American Military University
Dr. John Theodore

Economies everywhere in the world have fluctuations, there Gross Domestic Product (GDP) is either growing (economic boom) or it is not producing enough and falls into a recession. In a recession, an economy’s GDP suffers two consecutive quarters of negative growth. Personal consumption, government spending and the amount a country imports and exports measure GDP (Amadeo, nd) while Rittenberg and Tregarthen state that personal consumption (C), gross private domestic investment (I), government purchases (G) and net exports (Xn) make up GDP (2009). The most recent recession in the U. S. economy was in 2008-2009 when the U.S. saw four quarters of negative growth (Amadeo, nd). Fiscal and monetary policies are in place to help an economy avoid or recover from a recession.

Fiscal policies are the government’s attempt to stimulate the economy during a recession by spending government funds and by lowering taxes on the public. Lowering taxes will increase the disposable personal income amount families have during the recession in hopes that families and firms will have more money to also help stimulate the economy. There are natural stabilization polices with the government too that help an economy during a recession and automatically reverse during a period of growth. Government transfers such as unemployment benefits increase during a recession and the amount of taxable income decrease with rising unemployment levels. However, during a period of economic growth, these two automatic stabalizers reverse rolls as the unemployment rate drops and taxable income increases (Rittenberg and Tregarthen, 2009). These stabilization policies are in affect to prevent high rates of unemployment and inflation. Rittenberg and Tregarthen best described, “discretionary government spending and tax polices” to shift the aggregate demand....
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