According to the macro-economic theory, there are several policies used to stabilize the economy of a country. The most common policies used to achieve this objective are the fiscal policy and the monetary policy. In economics, fiscal policy is involved in controlling the government expenditure. Applying it in stabilizing the economy of a country, it dictates government expenditure so as to stabilize the economy of the country. The main elements used to stabilize the economy are the government expenditure and revenue generation into the economy through taxation (en.wikipedia.org). Contrasted to the fiscal policy in stabilizing the economy is the monetary policy. In this policy, the economy is stabilized by controlling the overall spending rates and the interest rates (amount of money in the economy). This calls for direct or indirect control of the economic activities in the country. Closely examining the two economy stabilizing policies, it is clear that the two are closely related and intertwined making it difficult to claim that an economy can be solely stabilized using one policy (en.wikipedia.org).
Fiscal policy usually impact on the following areas of the economy.
1. The aggregate demand and level of the economic activities.
2. Pattern of resource allocation.
3. Income distribution.
As a result, the fiscal policy can be claimed to take three forms making the economy to either neutral, deficit of surplus economy.
In a neutral or balanced fiscal policy, the total government expenditure is fully funded by the revenue generated through taxation and other government income generating projects. This makes the economy to be in equilibrium and the overall effect on the economic activities is zero. If the fiscal policy is expansionary, the total government expenditure exceeds the income generated from taxation and other government income sources thus the economy operates on some borrowed resources. This policy is employed once an economic recession occurs. The last stance of fiscal policy is the contradictory policy. This policy is taken or employed once the economy is having a surplus due to less total government expenditure compared to the revenue collected. The surplus is usually used to pay off some government debts. This information is not complete by itself since some cyclic inflation may cause unexpected changes in the revenue or taxation. This is the type of economic stabilization policy proposed by Keynesian economists (en.wikipedia.org). The Keynesian theory suggests that the federal government can stabilize its economy by and increase the aggregate demand in the economy by reducing the government expenditure and compared to revenue generation. Increased interest rates should be induced once economic boom begins. A budget for the surplus in the economy should be developed so that the surplus budget can be used to either scale down the rate of economic growth or stabilize the prices during inflation. This has developed heated debates in which some economists argue that the economic stability can’t be achieved by controlling the expenditure or revenue since other important economic activities are not clearly addressed (tech.mit.edu).
Turning to monetary policy, the main argument revolves around money supply in the economy. Increased money supply usually results in increased inflation rates thus in case of inflation, the money supply to the economy should be restricted (economics.about.com). This is different from fiscal policy which dishes out the money (increased the money injected into the economy) so as to control the inflation rates. From a practical approach, injection of money into the economy results in devaluation of the currency since everyone has the ability to purchase at an earlier set price. As a result, the inflation rates in the economy are elevated to higher levels than the initial levels (tech.mit.edu).
Looking at how the monetary policy stabilizes the economy, the stances employed are either expansionary or contradictory. In the expansionary, money is injected into the economy at higher rates than is usual. This is done mostly when the government is in need of reducing the rates of unemployment. It is done by reducing the interest rates of banks and other money lending institutions. The contradictory monetary policy calls for increased interest rates and is used to control inflation by reducing the money supply (economics.about.com). Comparing the two, they result in economy stabilization but employ different techniques. The fiscal policy is best employed when in need of controlling the government expenditure while the monetary policy is best employed when dealing with money and economy. The fiscal policy is more generalized and thus less detailed on some aspects form the backbone of the economy while monetary policy is more specific on one of the key factors affecting the economic stability (money supply in the economy) (tech.mit.edu).
The two policies have had great influence in the minds of contemporary policy makers involved in stabilizing the economy. They have been able to analyze the economy according to the stabilizing economy. The policies drafted incorporate both ideas from the Keynesian theory and Hayekian theory.
Several measures are employed by the US federal government to control and influence money supply in the economy and the interest rates. Three main systems employed by the federal committee to achieve its objectives are discussed below (www.frbsf.org).
1. Open market operations. This is employed by sale of treasury bonds in open markets. When the treasury bonds are sold at a lower rate, more money is collected increasing the amount in the Federal Reserve. This reduces the amount of money in the circulation thus controls the money supplied. In case the economic status reverse, the government buys back the bonds injecting more money into the economy. This results in the general manipulation of the amount of money in circulation in the economy.
2. Reserve requirements. This tool regulates the amount of cash that a bank should have in the government reserve unit. The reserve ratio directly influences the money lending rates in the banks. Altering the reserve ratio also affects the amount of cash available for a bank to lend. The higher the reserve ratio, the lower the amount of cash available for lending. Assuming that the demand for cash is constant, this pushes the lending rates of the banks to higher levels.
3. Discount rate. This define the rate at which a bank or other money lending institution is charged as interest on short term loans borrowed from the federal reserve bank. If the rate is increased, the rate of borrowing on the banks is reduced making the amount of money available for borrowing from banks as loans is reduced. This results in overall reduced amount of money in the economy.
Evaluating the given questions on the type of policies involved, Mitchell’s quest of addressing obesity in children is neither directly linked to money supply thus is not part of monetary policy. The issue affects the government expenditure indirectly since it is not stated whether the amount will be sourced directly from the government funds thus can’t be solely claimed to be under the fiscal policy (www.frbsf.org).
Looking at the budget of the military, it is direct government expenditure. This makes the military budget to perfectly fit in the fiscal policy docket without any problems.
Mileage is indirectly linked to money. If the mileage is affected as stated in the question, the money supply and interest rates are also affected. This makes the mileage issue to be in the monetary policy.
Addressing the issue of unemployment, the main policy involved is the monetary policy. The government on the other side has to fund the unemployment reduction project affecting the government expenditure. This makes the issue to be partly addressed by the fiscal policy and partly by the monetary policy.
On the nuclear issue in Japan, the US government spends some money on the issue. This will add to the government expenditure but this will not inject any money into the economy as an aftermath. This makes the nuclear crisis issue to be classified under the fiscal policy.
Affecting the interest rates as stated in the question will affect the amount of revenue generated by the government. This in turn will result in either expansionary or contradictory fiscal policy of even a neutral fiscal policy. Therefore, the issue of taxation fits best under the fiscal policy.
The issue on interest rates affects the amount of money supplied into the economy. This makes the question on maintaining the interest rates up to 2014 be in the fiscal policy.
The issue on long term and short term interest rates is neither in monetary policy nor fiscal policy since it spans over several fiscal years and the policies adopted are mostly on short term basis thus can’t be classified in any of the policies.
Trade in treasury bonds is an open market operation that regulates the amount of money in the economy. This makes the question to fit very well in the monetary policy.
References
www.en.wikipedia.org/wiki/Fiscal_policy and monetary policy
http://tech.mit.edu/V130/N46/long2.html
http://economics.about.com/cs/money/a/policy.htm
