Fiscal Policy

vs.
Monetary Policy
Within a Recession
Caleb Shunatona
5/5/2013
EC201: Principles of Macroeconomics

Government Policies
The government has many different ways that it can effect an
economy. In general you can split them up in to two major
policies; The Fiscal Policy and The Monetary Policy. Both of
them can create great changes in the economy but do so in
different ways.

The Processes of Each Policy

The Fiscal Policy

With The Fiscal Policy, a government

adjusts its taxing, transfer payments,
and spending to influence the nations
economy.

The Monetary Policy

With the Monetary Policy, a

government changes the currency in
the economy by changing the supply
of money, the availability of money,
and the interest rates.

The Entities
Each of the Policies has its own entities that govern what and
how the government react to economic situations.

The Fiscal Policy is controlled and set

up by the congress and the laws
passed that effect the fiscal parts of
an economy. They adopt the budget
and set tax levels with some input
from the president.

The Monetary Policy is solely entitled to be

controlled by the Federal Reserve System
(Fed). The Fed is controlled and
coordinated by seven Board of Governors.
They are appointed by the president and
approved by the US Senate and serve for
14 years. The Fed is broken up into 12
districts throughout the United States each
with its own president and Federal Reserve

Similarities and Differences in

the Entities
The Fiscal Policy of the government is solely controlled by the

senate but the Monetary Policy does have some control over
them from the president and senate. The election of the
Board of Governors is overseen by the senate and the senate.
To limit the government influence on these Board of
Governments, the elections are only held every other year
and the president designates on as a chairman of the Board.

Tools Used Within the Fiscal Policy

Taxatio
n
When within a recession the
government will lower the
taxes within certain areas to
give people more money to
spend on the economy. In
2009, 14.8% of the GDP came
from taxes with the majority of
them being Individual Income
Taxes, Corporate Income Taxes,
and Social Security Taxes.

Government
Expenditures
To create more jobs and to
get more money into the
economy during a recession
the government will spend
some if its money on
services in the nations
market. By doing this they
create more jobs, raising the
employment rate and
money in the economy.

Transfer Payments
The Government can
create change in some of
its nations economy by
redistribution of income
within an economy. These
transfer payments can
come in the form of
financial aid, social
security, and subsidies for
businesses.

Tools Used within a Monetary Policy

The Tools of a monetary policy follow very simple objectives. They aim to change the
supply of money, the availability of money, and the cost of money. In a recession they
want to raise the money supply and availability of money, and lower the cost of
money. Here are some of the many tools they can use to achieve these objectives:

Changing the Money Supply

Short Term Interest Rates
Long Term Interest Rates
Money Velocity
Exchange Rates
Credit Quality
Treasury Bills
Bonds and Equities
Open Market Equilibrium

Expected Outcomes of the Policies

All of the expected outcomes of both
of these policies in a recession is to
get the economy out a recession
successfully without causing any
backlash to far from the equilibrium
point.

Within the Fiscal Policy the main projected

outcomes is to raise the amount of jobs in
the market place and to raise the amount of
spending money.

Within the Monetary Policy the effects of

the action taken by the feds are supposed
to get people within an economy to spend
there money and pump up the economy
within a recession.

Things that can change the

Effectiveness of the Policies

The Lags of The Fiscal Policy

The Data Lag (awareness of changes)
The wait-and-see Lag (time to decide to
react)
The Legislative Lag (lag within
legislation to pass)
The Transmission Lag (the time it takes
a passed legislation to happen)
The Effectiveness Lag (the time a policy
measure takes to cause a change)

Problems caused by the Keynesian

Model of the Monetary Policy
The Liquidity Trap: The demand
curve for money could become
horizontal at some low interest
rates causing no reaction within a
market from a change in the money
supply.
The Interest-Insensitive Investment:
If the investment demand curve is
vertical then any change in the
interest rates will do little to no
change within investments causing
no change in the economy

Personal thoughts over the effectiveness of the

different policies
There are many economists that have different views over the polices and if one is
more effective and safe than the other, especially to a case by case situation of
problems in the economy. Here are two economists view on each policy.

HAS MONETARY POLICY BECOME MORE

EFFECTIVE?

Fiscal Policy Effectiveness: Lessons from the

Great Recession

By, Jean Boivin

By, Pavlina R. Tcherneva

Overall, we find that the dominant cause

behind the alteration of the monetary
transmission mechanism is a change in the
conduct of monetary policy, characterized
mainly by a stronger response to inflation
expectations output since the early 1980s.
Moreover, our counterfactual experiments
suggest that the policy response to monetary
policy shocks and demand shocks has more
effectively mitigated the effects on output
and inflation since the early 1980s (Bolvin).

The Great Recession provided us with an

important teachable moment to uncover the
drawbacks of the standard policy response and
to set fiscal policy straight. It also provided
policymakers with an important moment for
action, which may have unfortunately already
passed. Two years after the financial crisis, the
public has gone weary of massive government
expenditures that have delivered so little in
terms of job creation and will likely not support
another large round of stimulus spending
(Tcherneva).

Pictures
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Works Cited
Boivin, Jean. Has Monetary Policy Become More Effective.

National Bureau of Economic Research, January 2003. Web.

Tcherneva, Pavlina R. Fiscal Policy Effectiveness: Lessons from
the Great Recession. Levy Economics Institute of Bard
College, January 2011. Web.