Principle of Economics

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Fiscal policy is used by the federal government; fiscal policy consists of taxation and government spending.

Monetary policy is used by the Federal Reserve and it consist of the Discount Rate, Federal Reserve Ration, and the Open Market Operation.

Fiscal policy is used by the federal government when our economy is going through financial hardships within our economy. During periods of financial distress, the federal government will increase government spending to stabilize our economy and the fastest way for the federal government to increase its monetary resources is to increase taxes.

Expansionary fiscal policy implies that the federal government is increasing government expenditures and/or decrease taxes to stabilize our economy and to promote growth and employment. The purpose behind expansionary fiscal policy is to circulate additional monies into our economy and to allow consumers the ability to increase their purchasing power to acquire additional goods and/or services.

Contractionary fiscal policy is when the federal government decreases government expenditures and/or an increase in taxation. Contractionary fiscal policy is used to contract our economy and to reel in expenditures, which would most likely to accompanied by higher taxes that would decrease consumer purchasing power.

Expansionary monetary policy implies that the Federal Reserve is seeking to increase our country’s money supply and to increase the volume of money that is circulated within our economy to promote economic growth and employment. Contractionary monetary policy implies that the Federal Reserve is seeking to contract our country’s money supply and to decrease the volume of money that is circulated within our economy as a stabilization mechanism. Contractionary monetary policy is used to slow down our economy and to prevent high levels of inflation.

Expansionary Money Policy is achieved in the following manner:

  • Decreasing the Discount Rate
  • Decreasing the Federal Reserve Requirement Ratio
  • Selling of Government Securities

Contractionary Monetary Policy is achieved in the following manner:

  • Increasing the Discount Rate
  • Increasing the Federal Reserve Requirement Ratio
  • Purchasing of Government Securities

The Discount Rate is the rate financial institutions are charged by the Federal Reserve to lend funds overnight or until the next business day.

The Federal Reserve Requirement Ratio is the percentage of money that financial institutions are required to save back in reserves from all checkable deposits.

The Open Market Operation is the sale and purchase of government treasuries and bonds. Open Market Operation is most frequent used as it allows the Federal Reserve to inject a large amount of money into our economy.

The first banker’s in the United States were Goldsmiths. Since gold is very heavy to carry, Goldsmiths began to issue notes so it was easier for consumers to exchange notes as a medium of exchange (bartering system) to acquire goods and service. To provide stability and uncertain the Federal Reserve was created and enacted as a country’s Central Banking System.

The federal funds rate is the percentage financial institutions charge one another to lend monies overnight or until the next business day. The Federal Reserve is known as the banker of last resorts as financial institutions who are unable to borrow funds from other financial institutions will go to the Federal Reserve for funds. The Federal Reserve was enacted in 1913 by President Woodrow Wilson. Goals and objectives of the Federal Reserve include:

Control the money supply

  • Supply the economy with paper money (Federal Reserve notes)
  • Provide check clearing services
  • Hold depository institutions’ reserves
  • Supervise member banks
  • Serve as the government’s banker
  • Serve as the lender of last resort
  • Handle the sale of U.S Treasury Securities (Bills, notes, and bonds)

There are two types of money supplies in the United States, the M1 and M2 money supplies. M1 money supply is considered as money and consists of checkable deposits, currency, traveler’s checks, money orders, and cashier’s checks. M2 money supply is not considered as money, it consists of the M1 money supply, savings, money market accounts, and certifications of deposit.

Money was created as an acceptable means to barter for goods and services. A bartering system would be very difficult for our economy to adopt as money serves, as the following functions:

  • Unit of account – This is the actual cost of a good and service.
  • Medium of exchange – Money is used to engage in monetary exchanges for consumers to acquire goods and services. A bartering system would align with a medium of exchange, but it is difficult to determine goods and services as a unit of account and store of value. Cigarettes used by incarcerated prisoners is the most successful bartering system in the entire world.
  • Store of value – Value assigned to the U.S. dollar. Other goods (commodities) that serve as a store of value include precious gems, diamonds, real estate, antiques, and paintings.

The Federal Reserve

Creation of Money

Your task is to complete all assigned questions to the best of your ability. Best of luck! In two or more sentences, describe the goals and objectives of the Federal Reserve? Does the Federal Reserve or the federal government set interest rates for our country? What are the three (3) monetary policy tools used by the Federal Reserve? What are the two (2) fiscal policy tools used by the federal government? In one to two sentences, define the term, “Quantitative Easing?” Does the Federal Reserve or the federal government print our country’s paper money? In one to two sentences, describe expansionary monetary policy? In one to two sentences, describe expansionary fiscal policy? Explain how the Federal Reserve would be able to contract our country’s money supply using all three monetary policy tools? Explain how the Federal Reserve would be able to expand our country’s money supply using all three monetary policy tools?

Tutor Answer

TutorLeal
School: UT Austin

Attached.

Outline
Introduction
Body
Conclusion
References


Course Title
Student Name
Institution Affiliation

Principle of Economics
In two or more sentences, describe the goals and objectives of the Federal Reserve?
The Federal Reserve focuses on strengthening the US economy. It can manage this by
maximizing on employment sustainability, stabling the prices of different products and
moderating interest rates; both long-term and short-term.
Does the Federal Reserve or the federal government set interest rates for our country?
The Federal Reserve sets the country’s interest rates. This I because when it reduces the interest
rates, the c...

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