Magruder’s American Government
1st Edition
ISBN: 9780133306996
Textbook solutions
All Solutions
Section 12-2: Fiscal and Monetary Policy
Exercise 1
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The government took a more assertive role following the **Great Depression** that was undergoing during most of the 1930s. It was one of the most globally spread depressions of the 20th century.
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In America, it happened after the fall of stock prices in 1929. It affected rich and developing countries. International trade, inflation, and employment had a rapid downfall.
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Before the Great Depression, the government didn’t partake in the economy as much as after the event. From then on, the government involvement in economic matters increased with a goal to preserve and secure the nation.
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The government works on making the national economy as great as possible, so if a bad event happens, it can be overcome with more ease due to the government’s commitment.
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**The Great Depression** is a global economic crisis that lasted from 1928 to 1939 and represents an event that led to an increase in the role of the Federal Government in the country’s economy.
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In the pre-economic crisis, the Federal Government played a weak role in the economy and did not regulate most of its aspects.
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The economic crisis began with the fall of the stock market in the United States, which led to a decline in the production of goods and services, deflation and high unemployment.
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After these events, the federal government decided to become more actively involved in regulating the economic processes in the country in order to bring them under adequate control and to try to prevent the events that led to the Great Depression in the future.
Exercise 2
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The **three key economic goals** the government is trying to achieve through different mechanisms are:
1) **economic growth** 2) **price stability** 3) **full employment**
1) **economic growth** 2) **price stability** 3) **full employment**
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1) The critical factor to pay attention to in achieving **economic growth** is increasing **gross domestic product** (GDP). GDP represents the total market value of goods and services of the country – it represents the economic output. Countries with a larger GDP provide more services and goods, resulting in higher living standards. It is a form for measurement of a country’s success.
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2) **Price stability** is determined by **inflation and deflation**. Changes in inflation and deflation in the system are normal. However, when it is excessive, it poses a problem. When prices are stable, they preserve the purchasing power of the national currency. Price stability affects the whole nation because when someone holds a certain amount of money and excessive inflation happens, the actual value of the money will be gone. Thus, price stability is vital to the economy.
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3) The term **full employment** regards the **employment spots** and, of course, the labor behind them, which makes a significant part of the whole nation. Good employment stats prevent poverty and reduce inequality in society. They improve companies, business opportunities, and the overall growth of the economic aspect of society. On the other hand, when there are no jobs, it is followed by poverty and social issues.
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There are three key economic goals that the Federal Government is trying to achieve:
**1. Full employment
2. Price stability
3. Economic growth**
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**Full employment.** It is very important to provide enough jobs so that as many people as possible work and in that way enable themselves and their families to survive, and at the same time contribute to the state through taxes. If people cannot find a job, they can leave their country in search of work, or worse, they can become beneficiaries of social programs.
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**Price stability.** Price oscillations are normal, but excessive oscillations that lead to inflation and deflation have a bad effect on the state’s economy. These cases can lead to a situation where the purchasing power of citizens is reduced or that citizens are unable to borrow and invest.
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**Economic growth.** If GDP increases, the economy grows and leads to a better standard of living.
Exercise 3
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The government can regulate its spendings, funds, and tax rates to administer and better the national economy through **fiscal policies**. All of these factors are crucial for the economy, and the actions of fiscal policies determine the outcomes that can bring issues and losses besides being positive.
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Furthermore, fiscal policies are not cheap and usually lead to increased taxes while at the same time risking trying to achieve efficiency. The outcome is unpredictable because the system is so complex and fluctuating.
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There are other options to better the national economy, and that might seem more safe and predictable. Therefore, policymakers usually hesitate to use fiscal policies. However, they can be a useful but risky tool for achieving goals and bettering the economy.
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**Fiscal policy** is one of the most important methods used by the government to influence the economy. Fiscal policy determines how the government will raise funds in the budget and how those funds will be spent.
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Congress and the Federal Government formulate and implement fiscal policy, but they do so very cautiously. Given the complexity of economic processes, the application of fiscal policy can cause some unwanted or unexpected effects. In economics, however, certainty is more desirable.
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Also, the application of fiscal policy can lead to tax increases. If the government wants to be more involved in certain processes, it must have the funds to enable it. One way to increase them is to increase revenues through taxes, which is always an unpopular measure among citizens.
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What is also unpopular in American society is the excessive interference of the government in economic processes, given that America is a capitalist society with a democratic character and a free market of goods and capital.
Exercise 4
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**Fiscal and monetary policy** affect the domestic economy in several ways.
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First, fiscal policy affects taxes and cash flows, that is, it determines how budget money is collected and spent. In this way, it affects the level of economic activity, redistribution of income and allocation of resources within economic branches.
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Monetary policy, on the other hand, determines the amount of money supplied by the central bank. It affects policy rate, reserve requirements, and open market.
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When the policy rate is decreasing, there is a decreasing of reserve requirements and an increase in the purchase of securities on the open market. If the policy rate is increasing, required reserves are also increase, and the sale of securities on the open market decreases.
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In this way, monetary policy affects asset prices, interest rates, growth expectations, exchange rates, etc.
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Both policies are used for key economic goals of the government such as price stability and economic growth. Fiscal policy is also used for political and social goals.
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**Both of the policies have a goal to regulate the national economy** just through different channels.
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**Fiscal policy** regards taxation, budget, and spending, which has an influence on employment and income. Employment enables consumers to invest and spend.
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**Monetary policy** regards the cash supply to the market and economy. Thus, monetary policies influence the rates of interest and the rate of inflation.
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A steadily growing economy is achieved by efficiently using monetary and fiscal policies to provide lower employment and preserve currency value.
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The government must coordinate with the central bank because if not, it might lead to the policies working against each other.
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Therefore, the use of monetary and fiscal policies largely influences the national economy. They are used to achieve national economic goals.
Exercise 5
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Federal governments pursue fiscal and monetary policies in order to boost the country’s economic progress. For this purpose, a number of government agencies have been formed, and the most important are:
**1. The Federal Reserve System
2. The Securities and Exchange Commission
3. Occupational Safety & Health Administration in the Department of Labor**
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**The Federal Reserve System** is a central banking system established in 1913. Main role of this central banking system is to implement monetary policy in order to ensure price stability, full employment, economic growth, etc. It consists of the Board of Governors, 12 regional banks, and a large number of other banks.
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**The Securities and Exchange Commission** is a key regulatory agency that oversees the nation’s stock markets. If it finds a violation of securities laws, a lawsuit will be filed. It consists of 5 commissioners and was created in 1934.
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**Occupational Safety & Health Administration** is an agency that works within the Department of Labor. This agency aims to secure and promote the basic rights of workers.
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The agencies that regulate American economic activities are:
1) **Federal Reserve System**
2) **Security and Exchange Commission**
3) **Occupational Safety and Health Administration**.
1) **Federal Reserve System**
2) **Security and Exchange Commission**
3) **Occupational Safety and Health Administration**.
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1) **The Federal Reserve System** (known as the Fed) is an important governmental tool that helps regulate the economy. It is a part of the executive branch that consists of the Board of Governors, 12 regional banks, and other member banks. The gathering of these important economic’s individuals is to strategize and achieve economic growth, full employment, and price stability, which would hardly be manifested into action without the Fed. The Fed’s role is to ensure stability and safety in the monetary system.
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2. **The Securities and Exchange Commission** (SEC) is a crucial regulatory agency that is also in the executive branch. The SEC ensures the security of trading by administering stock market and behavior from big corporations. It also ensures a righteous disclosure of finances that the companies publicly trade and protects investors. The power of the SEC is that it can demand court actions for frauds that regard economic matters. So its role is simple; regulate fairness, order, and effectiveness of the financial market.
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3. **Occupational Safety and Health Administration** (OSHA) protects workers’ rights and administrates the rightfulness and safety of the employment. Death at the workplace, wages, and contracts are all the concerns of OSHA. Furthermore, OSHA ensures safety and health conditions for the workers by administrating and providing education and assistance.
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