The key to a smooth-running economy is sound fiscal and monetary policies. We need policies that can be changed over time to better serve our Economy as a whole. The United States economy has had its ups and downs, and it is definitely in a downward period now. Still, fiscal and monetary policies can be adjusted to fit what is best for the United States. Understanding the basic concepts behind fiscal and monetary policies is necessary to understand the United States economy and the issues arising in the news lately.
Fiscal and Monetary policies are tools that the Federal Reserve Bank and the government use to help keep the Economy running smoothly. The United States has had periods of hard economic times since the beginning of our country’s establishment. The United States has had recessions, but our Economy has always been able to come back relatively quickly. The Great Depression during the 1930s started as a recession and bank crisis similar to today, but because of an initial lack of government presence, the recession evolved into a depression. This was a big turning point for the United States government when they learned they needed more than just fiscal policies. The United States realized that monetary policies were just as important as fiscal policies. Fiscal and monetary policies would help prevent another disaster like the Great Depression.
One of the biggest contributing factors to the great depression was the run on the bank. At the time, the government had no insurance on personal bank accounts like they do today. As the banks started to get in trouble and the Economy worsened, people began to get scared. People wanted to pull their money out of the banks. As more and more people pulled their money, the situation became more desperate. Banks were unprepared to handle the withdrawals, and many had to close their doors. After that, the government created a law under monetary policies to ensure personal bank accounts so that a run on the banks could be deterred in the future. If a bank goes bankrupt, people do not need to worry; the government insures deposits.
The government also uses fiscal policies to influence the Economy based on the reaction to current issues and predict where the Economy is going. The United States government needs to make these accurate predictions to adjust the money flow and interest rates. Increasing the money flow and lowering the interest rates spurs spending, stimulating the Economy. There can be more jobs when spending more, and the United States employment rate will increase.
The United States created the Federal Reserve Bank of the United States to balance the Economy. Seven governors and four rotating presidents control these banks, which have 12 divisions. This system is commonly referred to as the Fed. The Fed is independently run with no influence from other government agencies, which benefits the United States by distributing power to provide a different economic view.
The Fed can influence the Economy in three ways. The first is by buying and selling government securities. The second is by setting a required reserve ratio, which requires banks to always keep a certain amount of cash. The last is by offering a discount rate or lowering the interest rate. These three tools are very efficient at influencing the Economy.
Influencing the Economy by buying and selling government securities works through increasing and decreasing the United States money supply. When the Fed wants to raise the money supply, it buys securities from the banks. This stimulates the Economy by expanding the bank’s money to make more loans to people so that they will make more purchases. When the Fed decreases the money supply by selling securities, the bank pulls cash out of the Economy.
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The required reserve ratio also affects the Economy because it determines the amount of cash a bank needs. The more money the bank has, the more loans it can make to its customers. The more loans the bank makes, the more purchases it can make. The more assets, the more the Economy’s GDP increases.
Another way that the Fed can adjust the Economy is by raising or lowering the discount rate or interest rate. The interest rate is a big part of the Economy, and by raising and lowering the interest, the Fed can control the increases and decreases in GDP. The lower the rate, the more people will want to borrow money from the bank. These types of loans are generally expensive purchases, therefore raising the GDP. A side effect of adjusting policies can sometimes be inflation.
Inflation in the United States or any economy is not good. This means that the value of money, or the dollar, in this case, will decrease, making it worthless. An example of inflation is when a milk bottle cost one dollar in 2002, and in 2005, the same size and kind of milk cost three dollars. Inflation creates huge hardships for the United States government. The Economy has to be stimulated successfully without bringing down the value of the dollar.
When inflation increases too fast, the government has to slow down the Economy. The line between a productive economy and one infected by inflation can easily blur. This means it is hard to tell what is too much help and what is too little help from the government, making it controversial to the average person. Some people say taxation is the key to controlling inflation, but others think the government can not.
Using these fiscal and monetary policy tools, the government can predict and help stabilize the Economy in the United States of America. No one can see the future, but the government can make an educated prediction about the Economy. As our society changes, our Economy will also change, and fiscal and monetary policies will change with it. There is no perfect system for stable economics, but the more experience economists gain, the more efficient our fiscal and monetary policies become in the economic world.
