Monetary And Fiscal Policy Effects On Economic Growth

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In today’s society, many households and business are affected by monetary and fiscal policy in regard to real income and the increase in spending. Monetary policy affects the way society spends when the Federal Reserve regulates the amount of money in circulation. The Federal Reserve controls the money supply by the interest rates offered to banks. Therefore, more money is borrowed by the banks at lower interest rates which means more money will be in circulation. In contrast, higher interest rates yield less money circulation in the economy. In addition, The Federal Reserve Bank of San Francisco defines monetary policy as an instance where the Federal Reserve controls the volume of money and their price-interest rates (Econ, 2002). On …show more content…
Fiscal policy, tax cuts, and spending increases are a few to list. Fiscal policy directly correlates with profitable income and government consumption. This can be expressed in an endogenous model that shows the long-term effect fiscal policy has on economic growth. To further explain endogenous, the graphs are expressed in a situation where financial markets are perfect. In other words, these models express the effect of fiscal policy on income tax, consumption tax, and government consumption without financial frictions (Mino, 2016). Therefore, fiscal policy stimulates the economy directly depending on the nature of the policy. For example, “a rise in each rate of tax lowers the balanced growth rate, whereas a higher income share of government consumption accelerates long-run growth (Mino, 2016).” In contrast, this example could be used in reverse to explain that a decrease in the rate of tax will increase the balance growth rate. Though, this is provided that the “long-run effect of fiscal policy in the models mainly stems from its impact on the labor-leisure choice of the representative household (Mino, 2016).” Another factor to consider when explaining the effect fiscal policy has on the growth of the economy is the cut-off level of production efficiency. The academic journal explains this as the amount of productions workers are able to consume. In other words, the cut-off level of production efficiency depends on the wealth distribution between the workers and entrepreneurs. Therefore, there is a ceiling on how much entrepreneurs can produce, which effects the way workers buy. Overall, these situations are controlled by fiscal policy, which determines the increase or decrease rate of taxes. In result, the journal states how “the model shows that a change in the rate of tax on a profit income has a significant impact,” which will affect how workers consume leading to the growth of the economy

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