Essay On Fiscal Policy

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Fiscal policy

Fiscal policy is the deliberate act by the federal government to control its spending and taxation. It is an economic tool used by the federal government to exert an effect on the course of the economy. The Council of Economic Advisors is responsible for the decisions regarding the application of the fiscal policy. The council advises the president on the appropriate action given a particular economic condition. Expansionary fiscal policy and contractionary fiscal policy are the two general types of fiscal policy. Government spending and taxation are the two main tools of fiscal policy.

Expansionary fiscal policy is used by the federal government when the economy is in recession. It is applied so as to help to get the economy on recovery path. Expansionary fiscal policy involves an increase in government spending and reduction in taxation so as to boost the aggregate output. Contractionary fiscal policy is used when there is inflation in the economy. It aims at cutting down aggregate demand. The economy if affected by cyclical patterns. Fiscal policies are applied to help reduce the negative effects of these cycles. Fiscal policy is used control aggregate demand, employment and the national gross domestic product. Government expenditure and taxation greatly help to regulate the economy by regulating consumption thus affecting savings and investment.

Fiscal policy is ineffective in stimulating and controlling the economy. The policy is massively weakened by timing factor. Time to recognize a problem in economy, read the problem, and set out the appropriate policy to when it fully becomes operational. An expansionary for instance may lead to high interest rates and thus limiting investment. These render fiscal policy ineffective. The application of fiscal policy in the last twelve months has shown a rise in the economy from the deep depth of depression. The economy is rising from the previous year’s depression. The combination of tax reduction and investment in energy and infrastructure is starting to create jobs again. It is evidently clear that fiscal policy is yielding some good results.

Monetary policy

Monetary policy is a term that points to government’s actual act to influence money supply in the economy. The Federal Reserve through its board of governors is responsible for the implementation of monetary policy. Expansionary monetary and contractionary monetary policies are the two general types of monetary policy. The two are used to curb different economic extremes. Monetary policy has three main tools namely, open market operations, required reserve and discount rate.

Expansionary monetary policy is used in instances of recession. It involves the interactive use of monetary tools to increase money supply in the economy. Monetary policy is used to curb unemployment by lowering interest to create a simple credit creation environment so as to stimulate economic expansion through investment. Contractionary monetary policy is applicable at times of high inflation to control price levels. Money supply is reduced thus regulating the purchasing power of the economy. Monetary policy has been credited for its effectiveness in steering the economy in the desired direction. Monetary policy has been effective in controlling inflation and stabilizing prices. Contractionary policy is used to curb inflation by reducing money supply and thus reducing spending power.

Monetary policy has been destructive in its application in the economy. This policy is discredited for slowing down production and increasing unemployment. Increasing interest rates reduces companies’ investment and growth rate and subsequently reducing their employment capacity. It is thus become a hindrance to economic performance. Monetary policy has been instrumental in the economy gradually change for the better. The economy is slowly rising from the depression. The buying of treasury bonds through the open market operations has helped improve demand and overall economic growth.

Economic conditions

The United States economy has recently been hit by a recession. Different groups of scholars hold varying interpretation and predictions about the expected trends in the economy. The division of view is on whether the economy is rising or on stagnation. Varying accounts have been given to justify the same.

The changes in federal taxation policies as well as expenditure policies are believed to have a short run as well as a long run effect on the economy (Krugman). Lowering tax rates and working to close up the existing loopholes in the economy will help stir up the economy once again. This will also help minimize debt and deficit. This results in an immediate decline in the economy but will yield a better and steady economic picture thereafter. The improvement will be as a result of increased output.

The tough fiscal policies enforced in the Recovery Act, the United States economy is once again growing (Krugman, THE US ECONOMY). New jobs are being created. Improvements in infrastructure and energy have yielded their anticipated effects thus supporting economic growth. These will lead to a steady rise of the economy from its depression.

Arguments are also being put up that the implemented fiscal policies are becoming counterproductive. Federal Reserve official as well as the former chairman, Bernanke have pointed out that these policies are producing bigger drawbacks. The aggregate effect of this is that the economy is bound to experience a longer period of stagnation. The positive effect of the policies is being cancelled out by the cons of the same.The required input in terms of policies is being made to try and improve the economic status. The aggregate effect of these policies is positive. The economy is thus expected to be set for a gradual gain.


Krugman, Paul. "chronology of coverage." UNITED STATES ECONOMY (2015): 12-17.
"THE US ECONOMY." republicans lust for gold (2015): 17-23.