Example Of Essay On Monetary Vs. Fiscal Policy - What’s The Difference?
The difference between monetary and fiscal policies is that monetary policy is handled by both the Federal Reserve and the central bank. The central bank is given a mandate by the government to oversee the fiscal policies in order to achieve the set macroeconomic policy objectives. The goals include maintaining stability in prices of goods and services. This will ensure inflation do not occur in the state. The central bank also controls the monetary policies with an aim of providing long term interest rates moderately. It ensures that other banks and financial institutions provide loans with affordable interest rates. It does this by regulating interest rates given set by other banks and relevant financial institutions all over the state (Clarida et al. 08). Through establishing these monetary policies and regulations concerning loans and interest rates, the central bank ensures maximum growth in the state. The policies provide stability in the U.S economy and this stability will culminate into high employment rates throughout the U.S.
When inflation sets in, then employment will be affected. To ensure that employment is created in the U.S, the central government regulates the interest rates and this in turn enables people to borrow loans. The acquired loans are used in starting gainful economic projects that in turn create employment opportunities. When the Federal Reserve and the central bank control the volume of money circulating in the economy, then productivity in the state will be boosted. Furthermore, the monetary policies and regulations maintain the prices of goods and services in the state and thus further curtail inflation. The Congress further strengthens the monetary policies by ensuring free political influence from other organs of the government in the monetary policies (Clarida et al. 18).
The Fiscal policy is a program from the government that deals with the purchase of government goods and services. The policy ensures that the government spends a minimal amount of money in procurement of goods and services. The policies ensure the government does not overspend the revenue in purchasing government goods and services as this might affect other sectors of the economy. The policy regulates the spending on the transfer payments. The transfer of payments affects the balance of payment equilibrium (Clarida et al. 11) If this is not regulated, then deficit balance of payment equilibrium might set in. Fiscal policy is also charged with the mandate of determining the type and amount of taxes to be undertaken by the Treasury. The amount of taxes affects the economy. Thus regulations by the fiscal policy will ensure stability in the goods and services in the country.
The fiscal policy applies the tax cuts, and this ensures short-term economic growth. The policy regulates the taxes to protect the common citizen from being overtaxed by the revenue collecting bodies. During electioneering years, the fiscal policy is very crucial as it controls the overspending by the candidates vying for different positions and thus regulates the money supply in the economy. The fiscal policy ensures increased demand and economic growth through increasing the spending (Clarida et al. 07). It is done when the central bank and the central government liaise together and reduce the interest rates and enable people undertake different investments with minimal costs. The mandate of the central bank concerning the regulation of interest rates was seen during the economic recess in the U.S. The central bank regulated the interest rate and in the end the state was brought back to its initial economic stability. On the other hand, fiscal policies are pronounced during the electioneering years when, spending is regulated by applying the fiscal policies so as to control the volume of money circulating in the economy.
Clarida, Richard, Jordi Gali, and Mark Gertler. Monetary policy rules and macroeconomic stability: evidence and some theory. No. w6442. National bureau of economic research, 1998.