The key to a smooth running economy is having 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 the economy is definitely in a downward period now, but fiscal and monetary policies can be adjusted to fit what is best for the United States. To really understand the United States economy and understand the issues arising in the news lately, an understanding of the basic concepts behind fiscal and monetary policies is necessary.
Fiscal and Monetary polices are tools that the Federal Reserve Bank, and the government uses to help keep the economy running smoothly. The United States has had periods of hard economic times since the beginning our country’s establishment. The United Stated 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 to a depression. This was a big turning point of the United States government when they learned that they needed more than just fiscal policies. The United States realized that monetary policies were just as important as fiscal policies. By having both fiscal and monetary policies it would help to 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 did not have any insurance on personal bank accounts like they do today. As the banks started to get in trouble and the economy was getting bad people started to get scared. People wanted to pull their money out of the banks. As more and more people pulled their money the more desperate the situation. Banks were not prepared to handle the withdrawals, and many banks had to closes their doors. After that the government created a law under monetary policies to insure 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, deposits are insured by the government.
Fiscal policies are also used by the government to influence the economy based on reaction to current issues and prediction of 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 which stimulates the economy. When there is more spending there can be more jobs and the United States employment rate will increases.
To create some balance in the economy the United States created the Federal Reserve Bank of the United States. These banks are controlled by seven governors and four rotating presidents. There are 12 divisions of the federal bank. This system is commonly referred to as the fed. The fed is independently run with no influence from other government agencies. This is good for the United States because it distributes power to provide a different view of the economy.
The fed has three ways that it can influence the economy. The first way is by buying and selling government securities. Second by setting a required reserve ratio which requires banks to keep a certain amount of cash in the bank at all times. 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 increase the money supply it buys securities from the banks. This stimulates the economy by increasing the banks money so that they con 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 money out of the economy.
The Economy is also affected by the required reserve ratio because this determines the amount of cash a bank needs. The more money the bank has the more loans that the bank can make to their customers. The more loans the bank makes the more purchases that can happen. The more purchases, the more the GDP increase in the economy.
Another way that fed is able to adjust the economy is by 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 of GDP. The lower the rate, the more that people will want to borrow money from the bank. These types of loans are generally expensive purchases therefore raising the GDP. A side effect sometimes of adjusting policies can be inflation.
Inflation in the United States economy 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 bottle of milk in 2002 cost one dollar and in 2005 that same size and kind of milk cost three dollars. Inflation creates a huge hardship for the United States government. The economy has to be stimulated successfully without bringing down the value of a dollar.
When inflation starts to increase by too much too fast the government has to slow down the economy. The line between an economy that is productive and one that is infected by inflation can easily blur. This means that it is hard to tell what is too much help is and what is too little help from the government, making it controversial to the average person. Some people say that taxation is the key to controlling the inflation, but others think that inflation can not really be controlled by the government.
Using these tools of fiscal and monetary policy 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 educated prediction about the economy. As our society changes our economy will change as well and fiscal and monetary policies will change with it. There is no perfect system for stable economics but the more experience economist gain the more efficient our fiscal and monetary policies become in the economic world.