Question

1. Distinguish carefully between monetary policy and fiscal policy, and illustrate your answer with regard to the United States.

Answer 1

Monetary policy is usually conducted by a central bank, while the national government makes monetary policy decisions. However, in the short term, both monetary and fiscal policy can be used to affect the economy's efficiency. In general, a stimulating monetary policy is expected to improve the rate of output growth (measured by Gross Domestic Product or GDP) of the economy in the forthcoming quarters; tight or restrictive monetary policy is designed to slow the economy in the future to offset inflationary pressures. Similarly, stimulatory fiscal policies, tax cuts and spending increases are expected to stimulate short-term economic growth

The monetary policy goals are set out in the Federal Reserve Act. It specifies that the Federal Reserve System and the Federal Open Market Committee will aim to "effectively promote the objectives of maximum jobs, stable prices, and reasonable long-term interest rates" in conducting monetary policy. Using monetary policy instruments, the Federal Reserve will influence the amount of money and credit and their price-interest rates. In this way it affects jobs, production and the general price level

The US budget has shifted from a surplus to a deficit over the past year, in part as a result of fiscal policy changes. The shift has been caused by a combination of tax cuts, increased spending and the 2001 recession. The tax cuts and increased spending are part of the government's fiscal agenda aimed at improving short-term economic growth.