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U.S FISCAL AND MONETARY POLICIES 1MT445M5-5:Examine how fiscal and monetary policies affect the U.S. economy.Purdue Global UniversityU.S Fiscal and Monetary PoliciesSection 1: Forms of Money Supply(i) The coins in my piggy bank are part of the M1 measure of money supply.(ii) The funds in my checking account at First National bank also belong to the M1 category of money supply. (iii) The funds in my savings account at Second National Bank is also part of the M1 measure of money supply. (iv) The traveler’s check left over from my trip to Germany is also part of the M1 measureof money supply.(v) The available balance on my American Express Card is part of the M1 measure of money supply. Section 2: Required and Excess Reservesa. Reserve ratio= Reserve requirements Bank deposits5=Reserve requirements $70000Reserve requirements= $350000Excess reserves=$350000-$10000U.S FISCAL AND MONETARY POLICIES 2Excess reserves= $340000The reserve ratio is the proportion of reserve deposits required by commercial banks to maintain (ANGADI, 2020).The Federal Reserve inhibits commercial banks to lend or invest the reserve ratio as an intervention to protect customers’ deposits. A violation of the reserve ratio by commercial banks may result in incrimination, fines, penalties, and revocation of their trading licenses, among otherpunitive measures. b. Capital= Assets+LiabilitiesCapital=$76000+$76000=$152000Excess loan=$152000-$76000=$76000c. The M1 money supply increases as a result of loaning the excess money and depositing in another bank. Section 3: Types of Fiscal and Monetary Policy(i) Increasing corporate income tax rate is part of a contractionary fiscal policy. The contractionary fiscal policy is a government intervention aimed at generating money from the local economy by spurring growth of economic and commercial activities. Another aim of contractionary fiscal policy is to curtail unsustainable production andU.S FISCAL AND MONETARY POLICIES 3lower asset prices, which makes it easy for the citizenry to acquire wealth, bridge the income inequality gap, and participate in tax generation (Aye, Clance & Gupta, 2019). (ii) Increasing defense spending is an expansionary fiscal policy intervention. Expansionary fiscal policy implies that the governments aims to expand money supply to the local economy by reducing taxes and increasing budgetary allocations towards infrastructure and essential services, such as security, education, and healthcare (Amberg et al., 2021). As a result, there is sufficient liquidity in the economy to spur economic growth. Lowering short-term interest rates is also another government intervention aimed at expanding money supply. (iii) Deducting all daycare expenses from the federal income taxes is an expansionary fiscal policy intervention. The aim is to increase disposable income levels among the citizenry to enable them to afford decent lifestyles and pay for essential services. The intervention also enables the government to solve income inequality levels in the country by bridging the income gap between the wealthy and less affluent members of society (Aye, Clance & Gupta, 2019). (iv) Sale of government securities is a contractionary monetary policy intervention. The contractionary monetary policy intervention aims at generating money from the citizenry to fund government spending. Contractionary monetary policy interventions allow the government to cut spending and establish prudent measures of utilizing public resources and minimizing wastage. Other contractionary monetary policy interventions include increasing interest rates and raising bank reserve requirements. The interventions are vital in instances when the government requires to generateU.S FISCAL AND MONETARY POLICIES 4additional revenues to fund its ambitious plans. The government may alter Contractionary monetary policy interventions based on the country’s economic performance. (v) Purchase of government securities is an expansionary monetary policy intervention by the Federal Reserve to expand the economy. Other expansionary monetary policy interventions include lowering the reserve ratio and decreasing discount rates (Amberg et al., 2021). The expansionary monetary policy interventions enable the local economy to be innovative and to include more participants. The interventions have far-reaching implications for economic and commercial activities, which enhance the social and economic status of the citizenry. Expansionary monetary policy interventions are subject to alterations by the government based on economic target achievement and prevailing global macroeconomic policies. Section 4: Financing Budget Deficits(i) The government should maintain balanced budgets because of the following reasons. First, the government should avoid excess spending, which results in unfavorable measures of raising revenues, such as increasing taxes (Molocwa, Khamfula & Cheteni, 2018). Avoiding excess spending also how shows the government is responsible and has robust monetary and fiscal policies. Second, maintaining a balanced budget is imperative because it enables governments to prioritize its pendingby increasing budgetary allocations towards essential services, such as healthcare, education, and security. Further, it enables the government to lower spending on non-important projects and expenditures, such as staff entertainment and recreation allowances. Third, balanced budgets enable the government obtains additionalU.S FISCAL AND MONETARY POLICIES 5funding from saving on non-important projects, which it can channel in social welfareprotection programs. Fourth, maintaining a balanced budget enables the government to save its much-needed funds in payment of interest charges emanating from long-term external credit facilities, such as the World Bank and the IMF. The government used the resources to invest in meaningful and viable projects. (ii) The federal government can finance a budget deficit by the following measures. First,the federal government may sell government securities, such as treasury bonds, to raise the much-needed resources to fund the budget (Molocwa, Khamfula & Cheteni, 2018). The sale of treasury bonds enables the federal government to raise funds to finance long-term projects. Second, federal government can finance a budget deficit by raising taxes as a short-term intervention. The federal government can finance a budget deficit by borrowing from domestic and international

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Purdue BUFW A5240 - U.S Fiscal and Monetary Policies

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