Question

In matters involved with Domestic Policy-making , Bardes & Shelley go into great detail on the interplay between tax policy, fiscal policy, and monetary policy matters. What are the distinctions between these three levers that control economic activity at the federal level? What role does the Federal Reserve Bank ("The Fed") play when it comes to such matters? Lastly - define what is meant by our progressive federal income tax policy and what its specifics mean for low income earners versus high income earners.

Answer 1

These three policies are used by the Fed to control economic activities and achieve objectives. The distinctions between these policies are:

• In Monetary policy the interest rate is changed. So this influences the supply of money. It is carried out by Central bank by setting base interests. This leads to low aggregate demand based on high interest rates.
• In Fiscal policy, the tax rates are changed. This is done to control aggregate demand in the economy. This also affects the levels of government spending. The demand is hence increased along with decrease in tax and when demand needs to be reduced the tax can be increased.
• In tax policy, the government decides the rates of different taxes that are to be taken from the public on different basis. It is a component of the fiscal policy.

The Federal bank use these policies to have an influence on the economy. They use monetary policy to stimulate their growth by increasing supply of money. They control taxes to gain economic growth in Fiscal policy and Tax policy. This way they get better demand. Fiscal policy is used during recessions to increase spending. So they get an increase in aggregate demand to get the economy out of recession.

In progressive federal income tax policy, the tax rate increases with taxable amount , the tax rate progresses form low to high, hence this tax system is called progressive tax income system. This system creates a burden on higher earning families and reduces the burden on lower earning families due to the increase of tax rate with taxable amount.