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Fiscal & Monetary Policy

There are two methods that can be used to control (or at least to influence) the American economy: fiscal and monetary. Fiscal policy is that used by the government to levy taxes; its effect on the economy is to stimulate or slow down the economy by increasing or decreasing the amount of money available for investment and spending by varying the tax rate. The higher the tax rate, the lower the amount available for discretionary spending; conversely, the lower the tax rate, the higher the amount available for discretionary spending and the greater the stimulating effect on the economy.

However, there are political problems with fiscal policy, namely, voters are reluctant to elect politicians who promise tax increases (witness George Bush's problems with his backing down from "no new taxes"). This has led to increase interest in monetary policy as a way to influence the economy.

Monetary policy is largely controlled by the Federal Reserve Board (Fed), which can determine the interest rates that member banks pay each other and which is charged to banks for overnight borrowing. When interest rates are increased, the cost of capital is increased, and the effect on the economy is a general slowdown. When interest rates are decreased, the cost of capital is also decreased, and the effect is stimulation of the economy (Munro, 1995, p. 30).

The Fed's current strategy seems to be in keeping with maintaining a relatively low rate of inflation. When the Fed determined that the economy was growing faster than desired, which carries with it an increased inflation rate, it began increasing the interest rate, raising rates a quarter-point at each of its quarterly meetings during 1994 ("Forget the Critics," 1995, p. 27). The Fed decreased rates in mid-1995, amid signs that the economy had been slowed down sufficiently, but additional reductions in interest rates are unlikely (Matthews, 1995, p. 28).

Where fiscal policy is dependent ...

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Fiscal & Monetary Policy. (1969, December 31). In LotsofEssays.com. Retrieved 05:26, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1693643.html