Monetary Policy And Fiscal Policy Essay

1067 Words Oct 20th, 2016 5 Pages
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 the other hand, Fiscal Policy is set by the government to manipulate the amount of money with increases and decreases in taxes. In other words, the population has more of an incentive to work and spend, due to a cut in taxes. For example, when an individual has more disposable income they are more likely to purchase more goods than before, which will pump money into the economy. On the contrary, an increase in the tax rate will reduce consumer spending and saving. In addition, the article “What is the difference between fiscal and monetary policy?” simply defines fiscal policy as a government’s program that regulates the purchase of goods and supplies, while controlling spending on transfer payments and the amount of taxes (Econ, 2002).…

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