The Impact of the Current Fiscal Policy and Monetary Policy on the Federal Debt
In countries with different price digitizes, the terms of trade in different sectors are no longer affected by monetary policies. In such countries, the fiscal policies are usually developed with the objective of placing the national inflation in check and subsequently preventing further trade losses. The Federal bank system controls the amount of money available in the markets by controlling the discount rates at which finances are issued to financial institutions.
The discount rates at which the institutions receive money determine the rates at which they issue the funds to businesses (JariStehn & Leigh, 2009). Increasing interest rates increases the attraction for foreign investment. The Federal Bank also controls the reserve requirements for other commercial banks. The role of the government fiscal policies in controlling the monetary reserves may however be undermined in nations where the fiscal authorities act in independence of the national budget.
Moreover, the government’s efforts at maintaining price stability through fiscal policies may also be undermined when fiscal institutions venture into monetary policies. This is because they then take time to make the difficult decisions of cost cutting. The impacts of the time lag between the determination of a need to cut expenditures and the actual decision to do so are immense. For instance, it may result in a fiscal stimulus which can result in inflationary effects in the economy (Alesina & Giavazzi, 2013).
However, the fiscal stimulus may also result in other positive effects such as increase of employment opportunities. Congress is mandated to ensure that fiscal policies are made with the objective of achieving employment growth and price stability among other effects. This can only be achieved through the commitment of fiscal authorities who have the vision of achieving sustainability in the fiscal paths developed.
Alesina A., Giavazzi F., (2013) Fiscal Policy after the Financial Crisis. New York: University of Chicago Press,
JariStehn S., Leigh D., (2009) Fiscal and Monetary Policy During Downturns: Evidence from the G7. New York: International Monetary Fund
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