Use of Monetary and Fiscal Policy to Stimulate a County’s Economy 1

USE OF MONETARY AND FISCAL POLICY TO STIMULATE A COUNTY’S

ECONOMY

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 Use of Monetary and Fiscal Policy to Stimulate a County’s Economy 2

Use of Monetary and Fiscal Policy to Stimulate a Country’s Economy

Fiscal policy is the use of government spending and taxation to regulate the economy.

Whereas monetary policy is regulating the flow of money in an economy this is done to

achieve a combination of inflation and output stabilization. Economists agree that any

changes in the supply of money will lead to changes in prices but output measured as Gross

Domestic Product is fixed (Arestis and Sawyer 2003). Since wages and prices do not adjust

immediately a change in the supply of money can have a short-term influence on the actual

production of goods and services.

When in a recession consumers stop spending as much as they used to business

production declines and firms have to let go of a certain percentage of workers. These

organizations stop spending on new capacity. These might lead to an overall decline in a

country’s overall demand in such a situation the government can act counter to these by

taking the opposite direction. Monetary policy is usually that tool of choice that governments

use.

Just like in monetary policy governments can use fiscal policies to lower and raise

taxes and increase expenditure. When government lower taxes and increase expenditure, they

are practicing expansionary fiscal policy. In the short term while these may seem to only

bring positive changes by stimulating the economy, they may have a domino effect that is far

reaching. This is when a government is spending at a higher rate than taxes can be collected.

Fiscal Policy in the USA

The economic stimulus act of 2008 was an expansionary fiscal policy in which the

government attempted to boost the economy by sending taxpayers between 600$ to 1200$
 Use of Monetary and Fiscal Policy to Stimulate a County’s Economy 3

depending on their marital status and the number of defendants. This cost the government

152Billion.

Another example of fiscal policy in the United States was the American Recovery and

Reinvestment plan of 2009 in which the Government made an effort to boost the economy

(Hall and Jennings 2011). In this policy the targets were mainly education infrastructure and

increase of unemployment benefits.

The main objectives of the American Recovery and Re investment plan was to

stimulate the economy from the recession of 2008. Supporters of the plan felt that the amount

spent was still not enough to put the country out of recession (Chinn and Ito 2008, p.479).

Krugman argued the stimulus did help the economy to grow up again. With the gross

domestic product growing faster than expected.

Opponents of the policy felt that the massive government spending would invariably

be inefficient and be hindered by bureaucratic issues. Now more than a decade later it is still

difficult to evaluate in which direction the economy would have taken if the American

Recovery and Re investment Plan was not applied.

Economic conditions have improved in the US GDP took nearly four years to recover

losses accrued from the recession. Unemployment took nearly eight years to recover.

2020 and 2021 brought in new challenges to the government as there was the Corona

Virus Pandemic. This crisis led to closure of many businesses which in turn led to

unemployment. The economy has again started to recover partly due to major government

stimulus packages. This packages include the CARES act and Consolidated Appropriations

act.
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References

Arestis, P. and Sawyer, M., 2003. Reinventing fiscal policy. Journal of Post Keynesian

Economics, 26(1), pp.3-25.

Chinn, M.D. and Ito, H., 2008. Global current account imbalances: American fiscal policy

versus East Asian savings. Review of International Economics, 16(3), pp.479-498.

Hall, J.L. and Jennings, E.T., 2011. The American Recovery and Reinvestment Act (ARRA)

a critical examination of accountability and transparency in the Obama

administration. Public Performance & Management Review, 35(1), pp.202-226.