The monetary policy refers to how the government, through the Federal Reserve System (Fed), controls the economy’s money supply. For the Fed to succeed in its primary responsibility, they have other specific functions that they do. The Fed also regulates the banks, sets the rules for their operations, offers loans to banks, and sets specific regulations for controlling the money supply in the US economy. The Fed regulates money supply through setting the bank reserve requirement, setting interest that banks charge on loans they give to other banks, and engaging in open market operations. All these monetary policy activities by the Federal Reserve affect inflation, which refers to the general and rapid price rises that are specifically caused by more money supply in the economy. (Svensson). Inflation tends to cause economic instability characterized by a decrease in the value of the dollar.
Fiscal policy refers to the government’s ability to raise taxes, collect taxes, and spend them in strengthening the economy. The theory of supply-side economics is closely related to the fiscal policy and relates economic growth directly to a decrease in taxes. According to this theory, low taxes encourage more spending by the people and increased investments by companies, subsequently leading to economic growth. This is entirely wrong because low and medium-income earners represent a significant section of the economy, and cutting their tax promotes the economy better.
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CrashCourse tracks fiscal policy decisions that have been made by different US regimes. President Bush sort of reduced taxes while President Obama’s administration increased taxes for high-income earners. On the same note, the United States has registered a steady decrease in corporate tax since 1950, whereas the social security tax has increased over the same period. Despite the government’s efforts to reduce spending and achieve a balanced budget, it is almost impossible due to Mandatory Spending items’ existence. However, the government can concentrate on correcting the figures for discretionary spending items. Indeed, just like the public’s constant call, a balanced budget is good for the country because it reduces debt for the future generation (Costello).
References
Costello, A. M., Petacchi, R., & Weber, J. P. (2017). The impact of balanced budget restrictions on states' fiscal actions. The Accounting Review , 92 (1), 51-71.
CrashCourse. (2016). Monetary and Fiscal Policy: Crash Course Government and Politics #48 . Retrieved from YouTube: https://www.youtube.com/watch?v=_tULRch1PRQ
CrashCourse. (2016). Social Policy: Crash Course Government and Politics #49 . Retrieved from YuTube: https://www.youtube.com/watch?v=mlxLX8Fto_A
Svensson, L. E. (2020). Monetary policy strategies for the Federal Reserve (No. w26657). National Bureau of Economic Research.
