Fiscal and Monetary Policy

Fiscal policy refers to the study of How to influence the economy through government spending and taxation.

Fiscal policy describes two governmental actions by the Government. The first is taxation. By levying taxes the Government receives revenue from the populace. Taxes come in many varieties and serve different specific purposes, but the key concept is that taxation is a transfer of assets from the people to the government. The second action is government spending. This may take the for of wages to government employees, social security benefits, smooth roads or fancy weapons. When the government spends, it transfers assets from itself to the Public (although in the case of weaponry, it is not always so obvious that the population holds the assets). Since taxation and government spending represent reversed asset flows, we can think of them as opposite policies.

Monetary policy attempts to control the economy through interest rates and the money supply.

Simply stated, monetary policy is carried out by the Fed to change the Money supply. When the fed increases the money supply,  the policy is called expansionary.  When the fed decreases the money supply, the policy is called contractionary. These policies, like fiscal policy, can be used to control the economy. Under expansionary monetary policy the economy expands and output increases. Under contractionary monetary policy the economy shrinks and output decreases. There are three basic ways that the fed can affect the money supply. The first is through open market operations. The second is by Changing the reserve requirement. The third is through changing the federal funds interest rates. Each of these actions in some way affects the total amount of currency or deposits available to the public.

Both Fiscal and monetary policies are part of macroeconomics. Macroeconomics is a branch of economics that deals with t performance, structure, and behavior of a nation or regional economy as a whole.

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