Money, Fiscal Policy and Monetary Policy
Money is any item or acknowledged record that is normally accepted as mode of payments, measure of value, medium of exchange or mode of payment. Money has different functionalities, it acts as a standard of value, acknowledged medium of exchange, legalized tender for debt repayments and as a unit of accounting measure and/or a way of storing value. There are various standard measure of measuring money supply in the economy including the monetary base, M1, M2 and M3 where M1 is the total currency held by the public and financial institutions, M2 is the M1 plus all savings deposits and M3 is M2 plus large time deposits which includes the financial instruments (Feenstra, 1986). In the USA the Federal Reserve which is the central banking system of America influences creation and reduction of liquidity by controlling the amount of money available in the market by use of quantitative liquidity requirements.
Fiscal Policy and Monetary Policy
The economic stability of a country and the job stability would be jeopardized if no one tried to manage the business cycles. Lack of proper business cycle management would lead to long-term downturn during the recession period and during the growth or boom stage, prolonged periods of hyper-inflation would be created. USA federal government uses the fiscal policy to manage the business cycle. Policies on tax and government expenditure are applied, either contractionary or the expansionary policies (Burda & Wyplosz, 2017). The former expands increases money supply in the market while the later reduces money in the market. Fiscal policy is limited in that it could have an inverse effect on the economy that is, government spending may reduce the demand caused by market failures instead of stimulating the economy positively. Monetary policies are those measures that are used to keep the economy at bay by controlling money supply in the market. Monetary policies have a major use in controlling the inflation, reduction of unemployment rate and stimulating economic growth of the country. The Federal Reserve/ central banking system of USA is highly responsible in implementing various monetary policies such as banks reserves (Burda & Wyplosz, 2017).
Burda, M. C., & Wyplosz, C. (2017). Macroeconomics: A European text. Retrieved from: http://pdfdownloadsff.com/european-text-6th-edition-burda
Feenstra, R. C. (January 01, 1986). Functional equivalence between liquidity costs and the utility of money. Journal of Monetary Economics, 17, 2, 271-291. Retrieved from: ftp://ftp.soc.uoc.gr/students/makm507/Feenstra_-_JME_(1986).pdf