Expansionary Economic Policy Essay Example | Topics and Well Written Essays - 2250 words

Expansionary Economic Policy - Essay Example Fiscal policy stands for the power possessed by the federal government to tax as well as spend with an intension of achieving the goals of the economy. On the other hand, monetary policy deals with the important programs that make an attempt of increasing or decreasing the nation’s level of business activities through the legal regulation of money supply and credit. Despite the difference between the two, they both have a common goal of either decreasing or increasing the level of the business activities. A better understanding of the above two terms and what they stand for can be handled in the following subheadings. The Theory of Monetary and Fiscal Policy The theory of monetary and fiscal policy reveal that monetary policy stands for the whole process through which the central bank, government, and even the monetary authority are able to take control over three major aspects. The three major aspects include the money supply, interest rates that are meant to achieve the set objectives of stabilizing the economy, and availability of money in the economy. The monetary theory reflects on how one can be able to design the optimum monetary policy without interfering with the lives of other people. The theory goes further to give a suggestion that the monetary policy tends to rest on the relationship that exists between the price at which money can be borrowed, interest rates in an economy, and the total amount of supply of money (Persson 45-46). In addition, the money and fiscal policy make use of several tools in controlling the country’s economic growth, the exchange rates, as well as inflation. It must be noted that the exchange rates can only happen when there is another currency from a foreign country. However, if the currency tends to be under a monopoly of issuance, then there exist high chances that the regulation system might issue the currency through the existing banks, which might end up being tied to a central bank that can easily be con trolled by the authority in altering the money supply and influencing the interest rates. The theory gives an overview of the roles played by the policymakers in regulating the inflation in an economy. Policymakers play a big role in making time-to-time credible announcements that are aimed at informing the citizens on the changes in the interest rates and the amount of money available for borrowing. The theory reflects on the two ways in which the decision made by the policymakers can affect the inflation. In the first case, if firms and other consumers are made to believe that policymakers are working towards lowering the inflation, then there is a likelihood of a true anticipation of lower prices in the near future compared to the current ones. On the other hand, if employees tend to expect high prices in the near future, then there are high chances for employees to draw contracts that entail high wages. This is because employees aim at covering up the high prices in the economy through earning a relatively higher income. However, in an ideal economy, there is always a likelihood of introduction of a wage-setting behavior that is meant to solve such cases that have been mentioned above. The wage setting behavior attempts to balance the relationship between the employee and employer. In case the employees are receiving lower wages that cannot meet the demands of the high prices, then the