The government of United States uses the fiscal policy with the monetary policy to direct its frugality into the right direction. Fiscal strategy applies when the administration customs her expenditure with demanding powers to make an impression for the economy. On the other hand, the monetary policy is used to slow down the economy but it is controlled with the central bank with the aim of creating a good environment for the easy money. When this two policies are used well, they can both lead to the development of the economy or lower down the economy. In this paper we are going to see their differences and how the two policies work and which effect they bring to the economy. Fiscal policy is associated with the economist John Maynard. His work generally had a great influence on the other theories concerning with the working of the economy.
According to Ginsburg (1983), Keynesian theories have been over the past misused and also used to alleviate the economic centers. Keynesian theories suggest that the only way to steer our economy is by keeping watch to the actions of the government. This shows that the government should use its powers to create demand or even increase the demand through creation of a good environment for money. This will help to boost the economy by creating job opportunities. The movement for the theorist says that the monetary policy has limitations when it comes to solving the financial issues. This has created a debate between the Keynesian and the Monetarists. In spite of the fiscal policy being fruitful in the Countless Depression age, the Keynesian philosophies elevated a lot of queries during the 1980s owing to long reputation. Milton Friedman demanded that the administration actions that were successful did not aid the country to circumvent under average gross local product.
The fiscal policy has some effects to the economy which affect it either positively or negatively. It affects the gross development product. The policy is also affected by the natural lag or due to delay of the time. Another problem is that the foreign investors have to support the United States currency so as to invest longer in the market (John, 2007). This can make the American goods more expensive. On the other hand the monetary policy can either help to boost the economy or lower the economy. According to Lawrence (2012), in the early years the Keynesians did not have belief that the monetary policy could a long lasting impact in developing the economy. This was due to the two following reasons despite banks having the choice of lending out money, they may choose not to lend out due to lower interest rates. Another reason is that the Keynesians believe that the demand for the goods may not be equal to the cost of the capital is to obtain this goods. Despite that, the monetary policy has proved that it has some influence on the economy and the equity and income markets.
The matter of discount percentage has been frequently misunderstood owing to the customers not knowing the degree of their credits or the proportion at which they obtain the interest in their investments account. However, the rate that is being charged to the banks, seeks for the increasement of the reserve when they have to borrow directly through the fed. The decision of the fed to change the borrowing rules has a determining factor to the consumers on what to pay so that they can borrow and also what they can receive after depositing. Explaining this theoretically it will mean that the banks should hold the rates down so as to have reserves which are fewer and less excess hence the urge and increase demanding of money. However this raises a question between the fiscal or monetary policy on which is more applicable.
In conclusion, the United States of America has found a solution in combining the two policies so as to solve economic issues despite the two policies being different in terms of their effect to the economy. The Fed may be more applicable in this situation but fiscal policy is there to stay. However, some holdups at its possessions, the fiscal policy partakes to have a lot of effects for an extended period and monetary policy has remained confirmed to partake a short duration successes.
Ginsburg, H. (1983). Full employment and public policy: the United States and Sweden. Free Press
John, M. (2007). General Theory of Employment, Interest and Money. New Delhi: Atlantic Publishers
Lawrence, H. (2012). The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years. New York