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Finance: What is Fiscal Policy v. Moneta...5 Views
And finance Allah shmoop What is the difference between fiscal
policy and monetary policy Okay well you find yourself at
a party with a bunch of economists first Sorry Yeah
You need a wider array of friends clearly here And
second if you have to be there anyway why not
throw some gasoline on the conversational fire Now at least
poke the social corpse Well here's what you d'Oh ask
whether they're monitoring CE or Keane's Ian's Yeah we know
that doesn't sound like much but believe us with economists
all would turn this into this or maybe even into
this which will really stir the pot All right well
why Because monitoring us and Kenyans focus on different aspects
of government to impact the economy you could say they
uh you know believe in different magic monitor its focus
on monetary policy Surprise surprise and Keane's Ian's focus on
fiscal policy Okay monitoring they're all about the money Like
you know Jerry Maguire's guy Show me the money They
believe that by changing the money supply the government can
impact the economy Well how does the government supply money
Well the short answer is that the government prints the
money Yeah that cash in your pocket it comes from
somewhere but the actual process is more complicated The main
actor here in the U S Is the Federal Reserve
which is the U S central bank Every currency will
have a central bank That's the thing that controls the
money supply And you could say that the Fed controls
the flow of dollars Well how does it do this
magic key thing Well to fight recession the Fed can
lower interest rates Cutting rates makes cheap money so that
well people can borrow easily And then they get more
stuff for more of it to spend on stuff you
know to buy stuff which makes the economy go running
around well The Fed can also lower reserve requirements for
banks so that banks don't have to keep his much
collateral or cash in stock And then they can loan
out more money basically making more money available in the
the system More liquidity in the system cheaper easier available
money for people to borrow and or the Fed can
buy securities like swapping cash for equities or debt All
right so it's supplying the economy Then with cash Ola
and the Fed does stuff like this all the time
They're adding cash to the system and then drawing it
out later The more dollars out there while the more
there is to spend think about it like grocery store's
having a whole bunch of cassava melons on a warm
day They've got to get those melons out to the
public and get him eaten or well they end up
looking like this Yeah well the buzzword for your wild
and crazy party times is expansionary As an expansionary monetary
policy that is this set of activities is aimed at
expanding the growth prospects of the economy by making it
easier for buyers to buy You know like J T
sings at Bye baby Bye baby Bye baby So that's
on the stimulus side Growing a week or anemic economy
But what about when the central bank wants to fight
inflation because things have gotten too hot Well the value
of a dollar then is plummeting and old people who
have to hold secure safe low interest rate bonds are
losing buying power and they have to live in their
station wagons than down by the river What happens then
Well to fight inflation The central bank then tries to
contract the money supply puts it right on Weight Watchers
Basically it does the opposite of all of the previous
things It raises interest rates and raises bank collateral or
reserve minimums And it sells securities like it sells its
own T bills cash out of the system and putting
in its place well a bunch of paper promises to
pay it all back someday Well the goal here is
to take money out of the system right Higher interest
rates and higher bank reserves make it harder and or
more expensive for Joe Consumer and Joe Corporation to borrow
money moves then more slowly through the economy Less cash
is in the system so it means less of it
to go around Yeah inflation then is knocked out or
at least friction ized or made slower Okay that's monetary
policy using the money supply to control the economy On
the other side of the coin are that Kenyans who
have a long history of being excellent runners the high
altitudes develop amazing lungs Wait wait That's something different Editor
he given the wrong paragraph Okay well that Keen's Ian's
Air Actually economists named after John Maynard Keen's and well
their economic magic is all about well managing the government
like new spending that well the government will take on
and then used to optimize whatever its vision of the
perfect economy is Okay So what does all this mean
While the process is generally called fiscal policy right Well
the main player this time is not the Federal Reserve
It's Congress and the president right It's the government getting
directly involved in managing the economy well Politicians hoping to
improve economic conditions have two main tools at their disposal
Fortunately for them and for the rest of us the
basic principle behind them are pretty simple The core thinking
is that inflation and recession are opposites of one another
During periods of recession there isn't enough money circulating in
the economy It's constipated During periods of inflation there's too
much money It's just gotten home from Indonesian food So
the answers to these problems and well so either put
money in or take money out of the economy As
a result when the economy is tanking the government can
increase its own spending or lower taxes When times are
bad people are out of work and businesses don't have
customers So Keens said the government should come in and
make up the difference Big Momma Government Yeah buy stuff
employed People put people on the dole dig holes filling
back up Where does the money come from Taxes Eventually
deficit spending Borrowing now on the other side of things
to fight inflation Well then the government does the reverse
The economy's going crazy Inflation is building bubbles or forming
tokens Ian Think the government should play a party pooper
here Raised taxes suck money out of the economy Meanwhile
the government curves its own spending so it doesn't add
to the wild party time right till the problem Government's
rarely do of this part People hate party pooper they
don't vote for them And members of Congress and the
president are elected by yes the people When times are
good politicians just want them to be better Maur Deficit
Spending More Borrowing Well the people the Federal Reserve have
the advantage of not being elected and the average Joe
six pack and not really knowing what they do well
it gives the Fed a lot more freedom to be
party poopers Alright recap time Fiscal policy involves government spending
in taxes while monetary policy involves the money supply in
the U S Congress and the president run fiscal policy
While the Federal Reserve runs monetary policy to stimulate the
economy the Fed can lower interest rates lower bank reserve
requirements or by security's on the open market which creates
more cash out there in the fields It's attempt down
the economy The Fed would reverse these like raise rates
increase bank reserve requirements and sell securities On the physical
side the government can pump up the economy by lowering
taxes and increasing spending to slow things down It can
raise taxes and lower its own spending right So yeah
that's fiscal v monetary policy Thus smackdown Of course Well
there's also honesty which if you ask most kindly grandmothers
is the best policy But it didn't work in politics
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