Fiscal and Monetary Policy. On the Most Essay

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fiscal and monetary policy.

On the most basic level, the primary difference between fiscal and monetary policy is that fiscal policy pertains to the actions of the federal government designed to influence the national economy through government spending and taxation while monetary policy refers to the actions of the central bank to govern the money supply. Tight or restrictive monetary and fiscal policy is used to curb inflation; a liberal monetary and fiscal policy is used as an economic stimulus (What is the difference between fiscal and monetary policy, 2002, As Dr. Econ).

2-Compare and contrast Keynes and Hayek

According to Keynes, it was sometimes necessary for the federal government to take a role in managing the economy, to correct the ebbs and flows of the business cycle. During severe recessions consumers became wary about losing their jobs, stopped spending money, and this further curtailed economic growth. Eventually, more and more workers were let go as production decreased and a depression occurred. Keyes said the government can forestall this phenomenon through government spending to give people jobs and encourage them to become consumers once more; it can also offer tax cuts. The government is allowed to spend at a deficit at such times, given that it can recoup the money once the economy improves. Keynes believed "that a prosperous society in which everyone is employed was the surest way of maintaining the independence of thought and action he considered the guarantor of true democracy" (Koehn 2011).

In contrast to Keynes, Hayek was far more terrified of hyperinflation than unemployment. He believed "that those who advocated large-scale public spending programs to cure unemployment were inviting not just uncontrollable inflation but political tyranny" (Koehn 2011). Hayek emphasized the need for prudent government spending and the use of the money supply as a tool to affect the economy. He believed in a balanced budget even during recessions, coupled with prudent tax cuts and spending cuts. In terms of Keynes' prescription for more federal spending Hayek stated "the creation of artificial demand...would only lead to another burst of inflation and another downturn" (Nasar 2011).

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Q3-The Federal Reserve policy tools

The primary tools the Federal Reserve uses to influence the money supply and interest rates include the buying and selling of Treasury securities, the raising and lowering of bank reserve requirements, and the raising and lowering of the discount rate (What are the tools of U.S. monetary policy, 2011, The Federal Reserve Bank of San Francisco.). By buying and selling Treasury securities, the Fed directly influences the amount of money circulating in the economy. When the economy is in a recession and the Fed wishes to stimulate the economy, it buys back Treasury securities, infusing more money into the economy and encouraging more spending and thus more job growth. Conversely, when the economy is overheated and inflation is a concern, by selling Treasury securities, the Fed encourages buyers to 'lock up' more of their money in the securities and decrease the circulating funds in the economy.

All member banks are required to keep a certain amount of money 'in reserve' that they cannot lend. This is to prevent 'bank runs,' which were common before New Deal legislation placed such reserve requirements on banks. Reserve requirements also gave the Fed a new tool to exercise control over the economy. When the Fed wishes to simulate the economy, it lowers the reserve requirements of banks, enabling them to lend more money. When it wishes to slow down consumption and curtail inflation it raises reserve requirements to discourage lending by banks and encourage borrowing and spending by consumers.

Member banks can borrow money from the Fed to meet reserve requirements more easily and lend to consumers. The discount rate is the interest rate charged by the Fed to member banks. When the Fed wishes to stimulate the economy, it lowers the discount rate to allow member banks to borrow more money and to lend that money to consumers, who will spend it. When it wishes to curtail economic expansion and inflation, it raises the interest rate to make….....

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