The Fiscal and Monetary policy and Economic fluctuations


TheFiscal and Monetary policy and Economic fluctuations


Fiscalpolicies are all the works of the government in both the expenditureand revenue components of the national income, and all are gearedtowards influencing the level of economic activities (Tanous &ampCox, 2011). There are various instances where the government usesfiscal policy measures such as the utilization of huge amounts ofmoney in the expenditure component of national income throughborrowing. Additionally, the government may decide to raise theamounts of taxes collected, but retain the expenditure levels.Thirdly, the government may increase taxes collected coupled withincreased expenditure levels. Monetary policy refers to any action byFed geared towards influencing the level of economic activities.These actions range from the availability of money in the economy tothe costs of credit. The principle behind which any monetary policyis established is based on the levels of interest rates (Sexton,2011). Recent years have been coupled by several changes in theglobal economic activities starting with the terrorist attacks ofyear 2001 to the global crisis that happened in the year 2008. Fedmaintains a stable economy through application of both fiscal andeconomic policies to ease economic fluctuations.

Currenteconomic situation in the U.S.

Thepast five years of the U.S economic activities have been coupled byseveral changes some from the government while others are from theoperations of the economy brought about by the law of demand andsupply. A notable change by the Fed is the lowering of the federalfund rates which are now between 0% and 0.25% (Tanous &amp Cox,2011). This action is geared towards the stimulation of the economyto achieve maximum economic benefits. Fed has the responsibility ofmaintaining healthy economic practices. Fed has been able to reducethe interest rates from highs of above 3.5% to the current low of0.25%, and all this is to stimulate the economy.

Accordingto the consumer price index figures, there has been a notable changein the purchasing powers of the majority of Americans. CPI statisticsindicated a notable rise in the consumer purchasing power as comparedto five years ago (Sexton, 2011). The statistics released in themonth of June indicated a rise of 0.1% for all other items with theexclusion of food and energy. The statistics also indicated a figureof 2.1 CPI for all the items and 2.3 for food and 3.2 for energy.Growth in the levels of GDP has increased since the end of the globalcrisis in the year 2009 although the first quarter of 2014 witnesseda decrease in the GDP growth (Tanous &amp Cox, 2011).

Jobscreated in the economy have been on an increasing trend. This hasresulted to a steady decrease in the level of unemployment whichstood at 7.8% by the end of year 2013 to the current rate of 6.3% in2014. However, a critical analysis of the unemployment statistics forthe past five years indicates an irregular pattern which is hard topredict. For instance, the unemployment rate stood at 5.5% in theyear 2009 compared to the current fiscal year. Although, there havebeen a slight changes in the economic growth of the entire economy,notable positive changes such as increased employment through jobscreation has been witnessed. The economy has grown at a lower of2.25% compared to the historical rate of 3.25% (Sexton, 2011).However, economists predict a higher growth by the end of year 2014which should be coupled by more jobs being created. Fed has beenable to maintain a reasonable range for the federal funds ratesthrough the entire period of five years. Inflation rate currentlystands at 2.1% figure which is slightly close to the Fed projectionof 2.0%.

Explanationin the changes in interest rates, inflation, and unemployment rates

Interestrates have been contained by Fed to operate between 0% and 0.25%throughout the entire period of the five years. Fed has applied theunconventional policies to contain the interest rates though it hasreceived criticism from economists. This is guided by the goal ofincreasing jobs creation to curb the unemployment menace (Sexton,2011). Lower interest rates also indicate a short term pricestability of goods and services which will increase the consumers’appetite for those goods and services. Interest rate is a monetarypolicy that operates in the aggregate demand side of the economy. Thelower interest rates coupled with the other operations by Fed poses athreat to the economy through increased growth in the money supply inthe economy this may pose a threat to the stability of prices ofgoods and services in the future (Tanous &amp Cox, 2011).

Unemploymentrate has changed from a level of 7.8% to the current level of 6.3%. The changes have resulted from the creation of more jobs due to thepositive stimulants injected into the economy by Fed (Mankiw, 2011). Monetary policy by Fed has resulted to the steady decrease in thelevels of unemployment as explained by the Fed’s objective ofattaining full employment. There is a linkage between the levels ofinterest rates and unemployment rates. Fed applies expansionarymonetary policy which lowers the interest rates thus increasedinvestments and in turn more job creations (Tanous &amp Cox, 2011).Inflation has also been contained at a figure which is almost Fed’sprediction. According to the Philips curve, the inflation rate isrelated to unemployment in an economy. The curve sums it all that alower level of unemployment is coupled by a higher level ofinflation. It is from the curve that we get the concept of zerounemployments and zero inflations. The curve suggests that the twoscenarios can never happen simultaneously.

Strategiesfor people to spend money

Strategiesbased on monetary policy

Thefirst strategy Fed may employ to encourage expenditure and thusincreased economic growth is the interest rates policy (Mankiw,2011). Fed is able to apply both the contractionary and expansionarypolicies in their respective manners according to the goals to beachieved. Fed, through the regulation of Fed funds interest rate, mayapply this concept to encourage investments and protection of smallscale borrowers. Lower interest rates are associated with thedevelopment in the economy as many Americans are able to obtaincredit at reasonable cost and thus encourage spending (Tanous &ampCox, 2011).

Thesecond monetary operation by Fed is the open market operations. Thisinvolves the buying and selling of marketable U.S securities that areavailable in the market. It has both the expansion and contractionobjective of checking the economy. Expansion may be realized by thebuying of the securities by Fed. This result to the issuance of newcurrency which raises the cash base in the reserves of monetaryinstitutions and thus, funds are available for credit to consumers(Sexton, 2011).

Strategiesbased on fiscal policy

Fiscalpolicy is implemented by the government with the goal of benefitingthe citizens.


Governmentuses tax to check on the operations of the economy. The governmentwill lower taxes to encourage consumption and thus economic growth.Lowering of taxation levels of various goods and services willencourage consumption which will result to economic growth (Mankiw,2011).


Thegovernment may also use the expenditure component to increaseconsumption and thus economic growth. This mainly happens in thedevelopment of infrastructures which are labor intensive in nature.More citizens are employed in these projects and therefore, theywill have enough for consumption and thus the circular flow of income(Mankiw, 2011).

Explainhow the two (2) strategies that you identified in Question 3 couldaffect the unemployment, inflation, and interest rates.

Lowerinterest rates will encourage investments and thus more jobs beingcreated, and this will result to decreased unemployment rates. On theother hand, according to the Philips curve, a decrease inunemployment results to a higher inflation rate. Secondly, the use ofopen market operations by Fed will affect the availability of moneyin the economy which will affect the interest rates, inflation andunemployment (Tanous &amp Cox, 2011). Government expenditurecreates more jobs and thus lowering the unemployment rates in theeconomy.

Fedmaintains a stable economy through application of both fiscal andeconomic policies to ease economic fluctuations. In a nutshell,therefore, all the three components-inflation rate, interest rate andthe unemployment rate are interrelated in one way or another. Fedoperates the monetary policy whereas the government operates thefiscal policy. Economic growth and development are affected by boththe fiscal and monetary policy applied.


Mankiw,N. G. (2011). Essentialsof economics.Cincinnati, Ohio: South-Western.

Sexton,R. L. (2011). Exploringmacroeconomics.Mason, Ohio: South-Western Cengage Learning.

Tanous,P. J., &amp Cox, J. (2011). Debt,deficits, and the demise of the American economy. Hoboken, N.J: Wiley.