Monetary policy refers to the regulations that are there on a country’s supply of money and the interest rates that go behind it. Monetary policy is an important set of regulations since for instance in the U. S., inflation, stabilization of currency are all issues that are worked upon with the monetary policy stance. (Investor Words, n.d.)
Fiscal Policy refers to the Government’s spending policy concerning infrastructure, counter-economic cycles to decrease unemployment, deal with inflation, and achieve growth for the country. In an expansionary fiscal policy, the economy is said to grow fast since there are higher taxes that are charged and revenue is greater expenditure. In a ‘contractionary’ fiscal policy the opposite takes place as expenditure is greater than revenue and there is a lot of deficit spending. (Business Dictionary, n.d.)
The U.S. economy has fallen into a recession. It is a deep recession, so severe that some economic analysts say it might just persist for at least another year. The current unemployment rate has risen to levels not seen in over 20 years. The unemployment rate is at 8% and is expected to rise further. The inflation rate is -2.4 percent, meaning that overall, prices are falling. The views in the paper have been presented by the writer as coming through as the new Senior Economic Advisor to the President of the United States, as (hypothetically) he has asked for the writer’s recommendation on how to proceed further.
This part of the paper hence amalgamates the views of many experts who have given their advice over the issue and the author presents a brief solution as a proposal to tackle the problem, rejecting a few arguments and accepting a few.
I believe that Raymond’s suggestion is not up to the mark since lowering interest rates further would just make the people become more dependant on the system. It will not serve any purpose. However, what can be done is that the Federal Reserve maintains control over the money supply and credit in the economy. The Federal Reserve could either increase the money supply (which should be done), Lopez’s advice be followed partially, in collaboration with Tanney’s when they say that the Fed Reserve should involve itself in buying and selling securities held by the government from banks, business and even individuals. These could be bought with checks, because of which a new reserve is created. This calls for a new source in terms of money thetas being circulated, thereby when they are deposited in banks, a new reserve is born. Then, banks through this will be able to lend and invest even, because of the increased circulation in money or an increase in the money supply.
When the money supply is increased, a credit will be made loose, which will decrease interest rates subsequently. This will call for an increase in spending from businesses and consumers, leading to an increase in employment, and the problem of unemployment, as well as decreased spending, will both reach an easy solution.
Works Cited
- Business Dictionary (n.d.) Fiscal Policy.
- Investor Words (n.d.) Monetary Policy.