Left on its own the economy will self-correct towards an equilibrium state. However, the government will use fiscal and monetary policy to help stabilize the economy.
- In your own words define both financial and monetary policy.
In economics, monetary policy is controlled by a central bank such as the Bank of Canada or the US federal reserve. This type of bank controls how much money is in the economy and the interest rates that individuals and institutions pay. The government in charge usually appoints the central bank head to achieve their goals.
On the other hand, fiscal policy is controlled by the government more specifically the minister of finance in Canada. A government uses fiscal policy to manage the economy by deciding when to tax and spend revenue or borrowing more money to cover the shortfall.
- Describe how the government uses each policy if the economy is too hot and inflation is rising rapidly.
First, money policy, if the economy is too hot the government will raise interest rates on borrows to slow down purchasing and borrowing activity in the market. Also, the government will print less money because they are most likely exceeding their inflation target of 2%.
Second, fiscal policy, in a hot economy the government will typically raise taxes on individuals and …show more content…
As a result, I have confidence in these decision makers to make the best nonpolitical decision possible. Many people in charge of fiscal policy are wedded to their particular ideology meaning that you get a lot of group think. In a banking system like the federal reserve, the people on the board come from different background and have taught different economic theory. For example, the Charwoman and the Vice Chairman of the FED have a different economic philosophy. As a result, this dynamic allows well throughout policy discussion within the federal reserve
- In your own words define both financial and monetary policy.
In economics, monetary policy is controlled by a central bank such as the Bank of Canada or the US federal reserve. This type of bank controls how much money is in the economy and the interest rates that individuals and institutions pay. The government in charge usually appoints the central bank head to achieve their goals.
On the other hand, fiscal policy is controlled by the government more specifically the minister of finance in Canada. A government uses fiscal policy to manage the economy by deciding when to tax and spend revenue or borrowing more money to cover the shortfall.
- Describe how the government uses each policy if the economy is too hot and inflation is rising rapidly.
First, money policy, if the economy is too hot the government will raise interest rates on borrows to slow down purchasing and borrowing activity in the market. Also, the government will print less money because they are most likely exceeding their inflation target of 2%.
Second, fiscal policy, in a hot economy the government will typically raise taxes on individuals and …show more content…
As a result, I have confidence in these decision makers to make the best nonpolitical decision possible. Many people in charge of fiscal policy are wedded to their particular ideology meaning that you get a lot of group think. In a banking system like the federal reserve, the people on the board come from different background and have taught different economic theory. For example, the Charwoman and the Vice Chairman of the FED have a different economic philosophy. As a result, this dynamic allows well throughout policy discussion within the federal reserve