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The Monetary and Fiscal Policies Essay

The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Fiscal Policy is defined as the use of government spending and revenue collection to influence the economy. Monetary policy however is the regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation and stabilize currency. Although these two policies are meant to help stabilize the U.S. economy, both the fiscal and monetary policies, look like from past results, requires some change especially the fiscal policy.

In looking at the structure of Monetary and Fiscal policies, it must be understood how the two relate to each other within the government structure. The Federal Open Market Committee – FOMC – is the most important monetary policy-making body of the Federal Reserve System. It is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The seven Board members constitute a majority of the 12-member Federal Open Market Committee, the group that makes the key decisions affecting the cost and availability of money and credit in the economy whose decision-making increased the inflation rate by 1.5%. The other five members of the FOMC are Reserve Bank presidents, one of who is the president of the Federal Reserve Bank of New York. The Board sets reserve requirements and shares the responsibility with the Reserve Banks for discount rate policy. The FOMC is the policy arm of the Fed and the tasks of the Federal Reserve are to supervise banks, fixing maximum rates of interests.

The U.S Treasury, though it aids in much of the monetary management, represents the fiscal sector, which is the U.S Congress. Fiscal policy covers, such areas as taxation and other revenue gathering and spending measures. Fiscal policies are those actions that are enacted by the Legislative Branch of the U.S government, the Congress. Their fiscal policies are enacted through the U.S Treasury. Therefore, the Treasury is the arm of fiscal policy and the Federal Reserve is the arm of monetary policy. For example, even if Congress has allocated some amount of money to take over failing banks and savings and loans, and it is not enough, than the Fed can pump capital into the system by buying bank stocks. So, this is example of how the Fed interacts and influences the ups and downs of the economy.

However, as important as the two policies may seem, some changes are needed to make sure America doesn’t plunge even farther into the deep hole of debt, inflation, and unemployment. Monetary policy has been, somewhat consistent for unemployment has dropped recently and that the GDP growth has been a respectable 3% growth. But, the fiscal policy has been under fire for many things including the whopping 7.7 trillion dollar deficient.

As mentioned on TIME magazine, the predictions that not only Greenspan endorsed but also other high FOMC members as well. Greenspan saw that “it turns out that we were all wrong.” Both the budget deficient and the trade deficient also are expected to rise after this year’s quarter ends which brings some individuals such as Hilary Clinton to publicly criticize the was Greenspan has run the economy. Even the discount rates have increased by 7% which is a pretty high jump.

All together, amidst of all what has happened these past years, the economy has suffered into a degree. However, the policies/predictions should have been carefully examined instead of almost guessing. After the next fiscal year, the public would probably demand better care of their tax money or relief on the gas prices. In conclusion the one way to fix this mess is to make sure the same mistake will not be repeated.


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