INTRODUCTION
Economies these days face the challenges and combat with the rising inflation continuously. The structure of the macroeconomic policy encourages the economic growth. The tools used for the stability of the economy are in some of the cases referred to as the expansionary economic policy. The fiscal and the monetary decisions of the economy determine the policies which end recession. These policies are usually formed by the central banks which determine the increasing or the decreasing money supply. The expansionary policy is considered as an effective tool for managing the low growth periods which arise in the business cycle. The economists have to design the procedures and structure that when the money supply must be expanded or reduced. The economies at a certain point in time require injecting capital directly within the economy (Arnold, 2008).
This report will determine the expansionary economic policies and a discussion will be presented under which the fiscal and the monetary policies may be designed. The discussion will also present the significance of the role of the federal government in implementing different policies. The expansionary fiscal policy explains the actions which are necessary for the change in taxes and government spending. The application of these measures improves the aggregate demand, GDP and employment within the economy which strongly leads to the economic growth. The expansionary monetary policy determines the role of the Federal Reserve Bank and tools which lead to the stability of the economy.
EXPANSIONARY ECONOMIC POLICIES
The economies adopt different tools for overcoming the challenges of the economy. It is necessary for the government to move an economy out of recession to redefine the economic policies which lead towards recession. Such practices initiated by the federal governments are called as expansionary economic policies (Leamer, 2009). It is necessary for the economies to engage in the expansion, and this is the biggest contributing factor which determines the solutions for dealing with the challenging situations through which the economy is undergoing. The governments structure the solutions for dealing with the problems through the expansion of the fiscal and the monetary policy (Froyen, 2009).
COMPARISON OF THE FISCAL AND MONETARY POLICY
The fiscal and the monetary policies are both integral for the economic growth. The government policies are formed using the fiscal and the monetary policy. The fiscal policy is used for analyzing the tax and spending strategy and policy (Gartner, 2009). At the same time, the monetary policy is used for balancing the interest rates and the money supply. Both of the policies are the tools used by the federal government for affecting the economy. The fiscal policy is used for the federal spending and the federal policy, and the monetary policy is formed by the federal reserves. The role of the Federal Reserve is essential for the alteration of the money supply within the economy. The role of the money supply and tax spending are measured with the appropriate use of these policies (Leamer, 2009).
(Elle's Economy, 2014)
Fiscal and Monetary policies are useful for overcoming the effects of the recession. Moreover, these policies assess the scope which leads to the economic growth and development.
EXPANSIONARY FISCAL POLICY
Definition and Explanation
The term expansionary fiscal policy is the measures adopted by the government for increasing the overall aggregate demand. This is done by increasing the government spending and lowering the taxes. Higher government spending increases the aggregate demand, and this leads to the enhanced economic growth. Lower taxes by the state relate to the increase in the disposable income of the consumers (Froyen, 2009). This leads to the enhanced consumer spending (Kole, 1988). Such measures taken by the government increases the aggregate demand, and at the same time this leads to higher economic growth. One of the drawbacks of this process is that it may result in inflation. This is because of higher demand within the economy. The graph below shows the significance of the fiscal policy in lifting up the aggregate demand and stabilizing the economy. This depends on various different factors which takes place within the economy.
Government Spending and Taxes
Expansionary policy has a direct impact on the increase in the size of a government’s budget deficit. This is one of the biggest problems of the expansionary fiscal policy. Higher borrowings cause the markets to fear default, and as a result there are high chances that debt of the government increases. The impact of the expansionary fiscal policy depends on various different factors. These factors are crowding out, timing of the fiscal policy and supply side effects. All these directly interrelate and promote higher government spending and borrowing (Froyen, 2009).
The timing of the fiscal policy is extremely crucial as it signifies the state of the economy and shows that the economy is operating at full capacity. Some of the applications of the fiscal policy have a direct impact on the inflation within the economy. Within a liquidity trap, the private savings rate rises rapidly, and this helps in offsetting the rise in the private sector which injects the required amount of money within the system. The role of the fiscal policy is also directly on the supply side of the economy, and this lowers the income tax which may increase the incentive of individuals to work. Higher government spending must be made on education and training of the individuals. This increases the productivity of the individuals in the long run. The government spending at some of the time is inefficient and depicts a waste of resources (Gartner, 2009).
The federal government uses several different tools for engaging in expansion. The methods for doing this are by incorporating the change in taxes and in the government spending methods. When applied taxes are less then labor is motivated to work more efficiently. With the application of this tool, the government spending also increases. Both the tools are used for enhancing and improving the economy. The government has complete control over the taxes and the government spending of the economy. The government uses the fiscal policy for increasing the money supply and utilizes the capital using which capital can be raised. The governments use the fiscal policy so that better utilization of money can take place. The vice versa term is the contractionary fiscal policy in which the taxes are higher, and the government spending lower.
Impact on National Income
The expansionary fiscal policy increases the input and national income for the economy. It is the best method which can be applied by the economy during the recession. When the government lowers the taxes than then the consumers have a higher level of disposable income. The dynamics of the policy can be understood from the equation which has been shown below.
Y = C(Y - T) + I + G + NX
The decrease in T gives a more stable Y. This leads to an increase in C which is a significant for an increase in Y. This is the same when the government spending also increases. This shows the importance of taxes and government spending (Arnold, 2008).
Impact on Aggregate Demand, GDP and Employment
The change in the policies of the economy has a direct impact on the aggregate demand, GDP and employment. If the policies designed are favorable for the labor, then the production capacity will increase as they work harder. This will raise the GDP of the economy and also enhance the employment structure within the economy. GDP is one of the most significant factors which assist in analyzing the health of the economy. The goods and services produced by the country determine the GDP. It is the measure of the income of individuals and the purchasing power which they possess. Apart from this employment is also a factor which is dominated through the GDP. If the GDP of the economy is high, then it shows better employment opportunities for individuals. All these factors improve the economic condition and contribute to its stability are managed with the use of an appropriate fiscal policy (Froyen, 2009).
In times of recession the economy is weak and the chances of expansion are much lesser. For this purpose, the individuals use tools such as the government spending and taxes for ensuring that all the available resources are effectively utilized for stabilizing the economy. The expansionary policy has a direct impact on the national income and hence requires that different policy multipliers are used for managing change in the output (Mankiw, 2009). The application of the multipliers has a direct impact due to the change in policy. This is also related to the willingness of the population to consume. This is also referred to as the additional dollar which the individual will spend on the goods and services. There are different multipliers for the tax and the government spending.
EXPANSIONARY MONETARY POLICY
Definition and Explanation
The monetary policy is the tool used for managing the money supply of an economy. All the function is managed in relation to demand (Arnold, 2008). All these factors are managed by increasing the interest rates and increasing the discount window for the customers. All these are the indirect methods for expanding the monetary policy. It is also referred to as the monetary policy of the authorities for expanding the money supply and boosting the economic activity. This is the tool which keeps the interest rate low and encourages the borrowing by the company’s individuals and the banks. The major role of the expansionary monetary policy is ensuring that all the quantitative problems are resolved. The central banks are responsible for ensuring the purchase of assets from the banks. This is crucial for lowering the yields on the bonds and creating cheaper borrowing facilities for the banks. All these measure result in the increase of the inflation. This is necessary for the banks because it raises the level of inflation and results in reduction of the money value (Financial Times, 2013).
In the graph below, the impact of monetary policy is shown. The graph determines the relation between the aggregate supply and the aggregate demand. The details of the tools used by the economy for controlling the measures of the economy through the monetary policy are shown in the graph below.
The Feds use the monetary policy for controlling the money supply within the society. The feds use the multiplier tools for controlling the money supply within the economy as per the need. This is important for the open market operations and managing the discount rate within the economy. The change in the interest rates affects the money supply and impacts on the interest rates. The most essential role of the feds is to set the goal which influences the economic activity within the society. The most widely used tools of the Feds are the open market tool (Federal Reserve a).
Role of the Federal Government
The role of the Feds is to buy the bonds from the banks, control the reserves of the banks, ensure appropriate and safe investment of the money, attract or retract the borrowers by increasing or decreasing the interest rates and ensure that the money borrowed is invested in the right dimension. Increase in the business activity also increases the aggregate demand and the growth rate. The monetary policy and the economic growth are considered as rapid, and this slows the economic growth and dampens the overall inflationary pressures. In the economic situations where the growth is slow then the Feds will adapt to the expansionary economic policy which falls under accelerating economic growth and lowers the unemployment rate (Federal Reserve a).
Applicative tools
The tools used by the Feds for designing the monetary policy of the economy are the required reserve ratio, the discount ratio and the open market operation. All these have a direct impact on the policy and methods which are adopted by the economy. Reserve ratio is the minimum amount that the banks operating under the Federal Reserve System have to maintain while operating along with the member banks. They must be held in the form of cash or deposits with the Federal Reserve systems. The demand deposits and the time deposits are essential for managing the minimum reserve required (Federal Reserve b). The discount rate is the interest rate charged by the commercial banks and other depository institutions when they borrow money from the related Federal Banks. All the discount window of the loans is fully secured. The credit program of the banks relates to the extension of the short term deposits by the banks. The open market operations are referred to as the purchase and sale of the securities which takes place in the open markets by the Federal Bank. It is one of the most key tools which the federal banks use for defining the monetary policies. The approaches of the banks have evolved after the occurrence of the financial crisis. The role of the Feds has been highly criticized after the occurrence of the financial crisis. Most of the methods have been designed as a remedial action for reducing the impact of the crisis. The policies have been determined for reducing the effect of recession and providing the scope to the economy for overcoming the challenges which have arisen (Federal Reserve b).
Interest Rate and Inflation Rate
The role of the monetary policy has a direct impact on the money supply. The interest rates set in the economy increase and decrease the borrowing within the economy. The government spending shows the amount of the money supply floating within the economy. Within the economy, the GDP and the employment rate determines the rise or fall of the economy. Through the structure of these policies, the impact of recession on the economy is reduced. The GDP and the employment rate of the economy are essential for measuring the scope of the economy (Mankiw, 2009).
CONCLUSION
The discussion presented in this report shows the significant application of the expansionary policy for coping up with recession. In the discussion above the role of the expansionary monetary policy and the expansionary fiscal policy has also been discussed. In this report, a comparison has been presented for the role of both the policies and this explains the significance of application by the federal government. The policies aim at stabilizing the economic growth and propose the methods which can overcome the effect of the recession. The details of the tools and techniques for overcoming the recession and suggesting the strategies for economic growth have also been assessed and presented in this report.
The fiscal policy is related to the applicable tax rate and the government spending. Similarly, the monetary policy is used for assessing the overall money supply which exists within the economy. It is controlled through the determination of the interest rate. The design of the policies has a direct impact on the GDP and employment of the individuals within the economy. The policies are defined by the Federal government so that the spending and the borrowings within the economy can be measured. This contributes to the economic growth and controls the negative effect of recession which takes place. The role of the expansionary monetary policy and expansionary fiscal policy is essential for controlling the overall scope of the economy. These policies determine economic growth and control the inflation rate. It also reduces the effect of recession on the economy and its progress.
Works Cited
Arnold, R. (2008). Economics. Mason, OH: South-Western Cengage Learning.
Elle's Economy. (2014). What does Fiscal or Monetary Policy mean?. Retrieved 10 Jan. 2014 from http://elleseconomy.com/2010/06/09/fiscal-and-monetary-policy-define/
Federal Reserve a. (2013). Open Market Operations. Retrieved 10 Jan. 2014 from <http://www.federalreserve.gov/monetarypolicy/openmarket.htm>
Federal Reserve b. (2013). The Discount Rate. Retrieved 10 Jan. 2014 from http://www.federalreserve.gov/monetarypolicy/discountrate.htm
Financial Times. (2013). Definition of expansionary monetary policy. Retrieved 10 Jan. 2014 from http://lexicon.ft.com/Term?term=expansionary-monetary-policy
Froyen, R. (2009). Macroeconomics: Theories and Policies, (ninth edition). New York: Pearson, chapter 3
Gartner, M. (2009). Macroeconomics, 3rd edition. Harlow: FT Prentice Hall.
Kole, L. (1988). Expansionary fiscal policy and international interdependence. In International Aspects of Fiscal Policies (pp. 229-272). University of Chicago Press.
Leamer, E. (2009). Macroeconomic Patterns and Stories. Heidelberg: Springer-Verlag Berlin Heidelberg.
Mankiw, G. (2009). Principles of Economics. Mason, OH: South-Western Cengage Learning.
