Economic Policy And Monetary Policy - 2426 Words

There are two types of economic policies to control aggregate demand in a market economy. These two types are known as fiscal policy and monetary policy. Fiscal policy is when the government changes their taxing amounts and their spending, for the purpose of expanding or contracting aggregate demand. Monetary policy is the changes in interests rates and money supply to expand or contract the same demand, but it is under control of our central bank. When it comes to fiscal policy, the government does two very different things to promote economic growth, depending on what is going on in the economy at a certain time. For example, if our economy is in a recession and is failing, this policy would involve lowering taxes and reducing spending.†¦show more content†¦But in a severe recession, such as in 2008-2009, the government resorted to increased spending, in order to get these times out of decrease and into economic increase. Another type of fiscal policy is aimed to create mo re expansions and fewer recessions in our economy. This is knows as the nondiscretionary fiscal policy, or automatic stabilizers. The main source of the federal money brought in is from progressive income tax, which aims to increase demand in a recession and decrease demand in an expansion, along with the welfare system. In the 2008-2009 recession, these automatic stabilizers made a much bigger stimulus than the changes made to taxes and spending by the government. When it comes to the monetary policy, the promoting of the economic growth comes from the Federal Reserve System. In order to make growth during a recession, the bank lowers interest rates and increase money supply. In an expansion, the opposite occurs, where the interest rates are increased but the money supply is decreased. This impact though can take several months for it to change the demand. An issue with this though is the fact that the bank is not controlled by the president or congress, but could be seen as a posi tive compared to the fiscal policy, which has to be overseen by both the president and congress. http://faculty.etsu.edu/hipples/fpvsmp.htm What caused the collapse of the first