Thursday, December 5, 2019

Fiscal and Monetary Policy in United States †

Question: Discuss about the Fiscal and Monetary Policy in United States. Answer: Fiscal and Monetary Policy in United States In government role in United States in fostering growth of the nation extends beyond its regulatory role in specific industries. US government has the objective to maintain overall economic pace, achieve goal of a high employment level, and stabilize prices. The two main instrument used for achieving these goals are fiscal policy and monetary policy. The fiscal policy is used to determine the level of government expenditure and taxation (Aghion, Hemous Kharroubi, 2014). Monetary policy on the other hand stabilize prices and inflation level by controlling the money supply. In the history of American economic policy, the regulation evolved using the through a combination of monetary and fiscal policy. Fiscal Policy Fiscal policy is the changes in government expenditure and taxes to stimulate the economy. Prior to great depression. The government the believed in the free market lasses-faire and tried not to intervene in the economic activity hoping to maintain a balanced budget. The present status of fiscal policy of US is determined as a police response of Great recession. In response to the recession, government realizes need for expanding transfer payment (Pereira Lopes, 2014). The fiscal expansion undertaken during this period initially leads to unprecedented deficit. The demographic trend and stretch of social security for points to a sustained increase in transfer and increases the possibility of fiscal deficit in the future. The following figures show the some key variables of federal budget of US such as outlays, revenues deficit and debt holding of the public as a percentage of Gross Domestic Product. The figures shows the ten-year budget forces as projected by the Congressional Budget Office. Before the great recession, average government revenue was 17.5 percent of GDP. Two consecutive recessions in US one in December 2007 and other in June 2009 made Federal government to design tax policy that decreased tax revenue significantly. In 2013, government has made a permanent cut in the tax rate that has reversed for some of the high-income earners. This has helped to bring the level of revenue to the normal level (Mbanga Darrat, 2016). Based on the estimate the expected average 18.1 percent in the next decade. In US on an average expenditure exceeds the revenues. The gap between revenue and expenditure are explained by the debt payment. The downward trajectory of government outlays in 1990s has reversed in 2000. After the great recession, there was a big surge in the outlays in approaching towards 24.4 percent of GDP during 2009. The decline in revenue and increase in government expenditure to boost the economy raises government outlays leading to high deficit. The government provides tax relief to the taxpayers in terms of reduction in the payroll and income tax. The decrease in the income tax as proportionate to GDP is due to the bracket creep. The discretionary expenditure and outlays for defense are projected to contract to stimulate productive investment. Government maintains is mandatory expenditures such as those for health care and social security. The health care and security would average 11.3 percent of GDP. The US government to escape the economy from shocks of the financial crisis increases fiscal expenses and largely absorb the deficits. If the projected tax revenue from income tax does not met the expectation then there are possibility lower interest rate gain to be cut out with revenue losses. Monetary Policy in US With growing importance on budget outlays the federal Reserves has shifted its attention towards the monetary policy. Monetary policy in the United State is designed by the Federal Reserve System and is reluctant to the agency of government. Commercial banks are abide by the Federal law while state ownership banks have optional membership. The main objective of the monetary policy is to control the money supply in the economy. To control the credit and money supply in US economy Federal Reserve uses three main tools. Open market operation is the most important tool that is conducted with transaction of government securities (Odell, 2014). In times of recession, it is needed to increase the supply of money. For this Fed buys securities from business, banks and individual to inject money in the economy. Government purchases securities in exchange of checks which when deposited in the banks creates new cash reserves. A part of these reserves banks lend and use for investment result in a n increase money circulation. When Fed wishes to contract the economy and a reduced money supply then it sells existing securities to the economic agents and absorb the reserves. A second tool for Fed money supply control is the specification for taking deposits that the institution need to be keep aside either in the form of currency in values or as regional reserve deposits. When Fed raises the limit of this, withhold money banks left with lower deposits to lend out and thereby helps to expand economy. The lowering of the deposit limit increases the money supply by raising more funds available to banks. Here, banks more often lend money each other to fulfill their reserve requirement (Crdia et al., 2015). During this time the decision regarding tight or lose monetary policy depends on the rate at which the money lends called the federal funds rate. Discount rate is the third determinant of money supply. The discount rate is the interest rate that commercial banks have to pay for f unds borrowed from the Reserve Bank. An increase in the discount rate discourages borrowing by raising the cost of borrowing while a decrease in the discount rate encourages borrowing. This is how discount rate alters the loanable funds for banks. These tools of Federal Reserve allows expansion and contraction of credit supply. The availability of money supply determines the interest rate and investment. However, there are factors that often complicate Fed ability of implement monetary policy (Lombardi Zhu, 2014). There are different forms of money and it becomes unclear about which one to target. Today, the importance upon the monetary policy and reduced role of fiscal policy reflect both economic and political realities. References Aghion, P., Hemous, D., Kharroubi, E. (2014). Cyclical fiscal policy, credit constraints, and industry growth.Journal of Monetary Economics,62, 41-58. Crdia, V., Ferrero, A., Ng, G. C., Tambalotti, A. (2015). Has US monetary policy tracked the efficient interest rate?.Journal of Monetary Economics,70, 72-83. Lombardi, M. J., Zhu, F. (2014). A shadow policy rate to calibrate US monetary policy at the zero lower bound. Martin, F. (2017).U.S. Fiscal Policy: Reality and Outlook. Retrieved 22 November 2017, from Mbanga, C. L., Darrat, A. F. (2016). Fiscal policy and the US stock market.Review of Quantitative Finance and Accounting,47(4), 987-1002. Odell, J. S. (2014).US international monetary policy: Markets, power, and ideas as sources of change. Princeton University Press. Pereira, M. C., Lopes, A. S. (2014). Time-varying fiscal policy in the US.Studies in Nonlinear Dynamics Econometrics,18(2), 157-184.

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