Fiscal And Monetary Policy Essay

1223 words - 5 pages

The difference between fiscal and monetary policy lies within the different tools wield, and aspects of the economy they influence. Fiscal policy generally deals with different sorts of taxes to manage earnings and spending in the population, and how the government benefits from these interactions. Monetary policy, on the other hand, affects the base value and amount of money in circulation directly, as opposed to simply leveling off amounts from the population to put into federal spending.
There are, primarily, two tools utilizing taxes that are used in fiscal policy to influence the economy. The first of these- Revenue tools- are the taxes collected by the government, both directly and indirectly. We experience direct taxes in the workplace with such things as income tax. As a business owner or CEO, you might have to face corporate taxes and capital gains taxes. Direct taxes can also affect our amount of wealth directly with the aptly named wealth tax, as well as the estate taxes. All of these are progressive taxes- they adjust according to the income of the individual, or the revenue of the company. Because of this, those with an income of up to $7,300 for an individual ($14,000 for a married couple) fall into a smallest tax bracket, and those who make anywhere above $326,451 (individually or combined) fall into the highest tax bracket, and therefore shoulder more of the countries responsibilities. (U.S. IRS). On the flip side, indirect taxes are the taxes that are imposed on goods and services. Sales tax is the most common example of this kind of taxation. This is a regressive tax- flat taxes that will affect every part of the population equally without regards to the individuals income.
The other tool of fiscal policy is the spending tool. This is, in its simplest form, the increase and decrease of government spending. Capital spending- the government investment in economic infrastructure- and transfer payments, which is the redistribution of income from taxpayers to those who need help and financial support- are examples of this tool being implemented.
The tools of monetary policy have to do with the currency in circulation and its value. One of the primary tools implemented by the government is open market purchases and sales- buying and selling different shares to increase or decrease the amount of money in the monetary base. These are usually permanent changes. In case there is a need for a temporary devaluation or increase in monetary amount and value, the government implements repos- the temporary buying or selling of government securities with the intention of the original owner buying back the share. When there is a dearth of money in local banks, a central bank offers them a loan (the discount rate)- another monetary policy tool- which bails them out.
Fiscal and Monetary policy both have their advantages and disadvantages. According to James Tobin, two of the main goals of monetary policy is to ensure the stability of the...

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