Introduction to Macro-Economics: Fiscal and Monetary Policy

Introduction to Macro-Economics: Fiscal and Monetary Policy

Introduction

Macroeconomics is the field of the economics that deals with how individuals change their economic behavior when there is change is the market-wide policies. One of the two applications that are widely studied in the macroeconomics is the Fiscal Policy and Monetary Policy.

The fiscal policy is implemented by the government of the U.S (Easterly & Rebelo, 1993). The monetary policy in the U.S is reviewed by the Federal Open Market Committee which works under the Federal Reserve. The monetary policy is reviewed during the schedule of 8 meetings per year, during which it is analyzed and discussed that how economic and financial developments taking place in the country and determines the appropriate stance of the monetary policy (Clarida, Galí & Gertler M, 2000).

Discussion

Fiscal Policy

The fiscal policy is the policy that is implemented to affect an economy. It includes the government revenues in the form of tax structures and the government spending. For instance, U.S. Congress and the President of the United States of America implement the tax policy and U.S. Federal Budget spending (Easterly & Rebelo, 1993).

The government can either implement fiscal policy either in the form the expansionary or the contractionary fiscal policy. Expansionary fiscal policy deals with the lower tax structures and higher government spending. Contractionary policy on the other hand is opposite to the expansionary policy. The effects of the contractionary policy is also opposite of the expansionary policy whose purpose is to increase the tax structures related to government spending (Easterly & Rebelo, 1993).

Monetary Policy

The implementation of the monetary depends on the structure of the central bank in any economy. In United States of America, U.S Federal Reserve is the independent central bank of its government. (Clarida, Galí & Gertler M, 2000).

Central bank can affect the monetary policy by expansionary or contractionary polices. The objective of the expansionary monetary policy is to increase the money supply in the market and to reduce the interest rates. The effect of these policies is the money will become cheaper and there will be more money at the hand of the people to purchase the commodities from the market (Clarida, Galí & Gertler M, 2000).

The prime objective of the contractionary policy is to reduce the market activities. Thus, the contractionary policy provides benefits of higher interest rates on the investments; the people will prefer to invest money rather than involving in extreme spending (Clarida, Galí & Gertler M, 2000).

The expansionary policies are implemented when governments and financial institutions including banks do not have required projects where they can earn the substantial profits especially in the market failure and deflation in the country. The contractionary policies on the other hand is implemented at the time of inflation, when there sudden spurt in the spending of the people. The central bank announces to increase the interest rates so that investors put their money in the banks and other financial institutions and thus results in slowing ...