U S FISCAL AND MONETARY POLICIES 1 MT445M5 5 Examine how fiscal and monetary policies affect the U S economy Purdue Global University U S Fiscal and Monetary Policies Section 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 iii The funds in my savings account at Second National Bank is also part of the M1 iv The traveler s check left over from my trip to Germany is also part of the M1 measure v The available balance on my American Express Card is part of the M1 measure of category of money supply measure of money supply of money supply money supply Section 2 Required and Excess Reserves a Reserve ratio Reserve requirements Bank deposits 5 Reserve requirements 70000 Reserve requirements 350000 Excess reserves 350000 10000 U S FISCAL AND MONETARY POLICIES 2 Excess reserves 340000 The 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 other punitive measures b Capital Assets Liabilities Capital 76000 76000 152000 76000 Excess loan 152000 76000 in another bank c The M1 money supply increases as a result of loaning the excess money and depositing 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 and U S FISCAL AND MONETARY POLICIES 3 lower 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 generate U S FISCAL AND MONETARY POLICIES 4 additional 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 pending by 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 additional U S FISCAL AND MONETARY POLICIES 5 funding from saving on non important projects which it can channel in social welfare protection 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 financial institutions at interest rates that may not disparage economic growth through exorbitant payments The federal government should also