Monetary Policy

Monetary policy 

Recently in our economics class we have been looking into how fiscal policy is used and what actions are carried out to make it work. Fiscal policy is based upon government spending and taxation, we now look at its partner Monetary policy. 

Monetary policy is concerned with how much money circulates in the economy and what that money is worth. It is controlled by the monetary authority of a country, which are those who control the money supply. Monetary policy focuses specifically on banks and federal reserves where all of our money comes from. It uses specific tools to reach these economic objectives which is infinitely the goal of price stability.

Using the tools 

Unlike our usual tools of fiscal policy, the use of taxation and government spending to regulate flow of cash in the economy, Monetary policy focuses mainly on interest rates with these operations are carried out by the Bank of Canada. A main goal by these banks is to use an "inflation control" system which is to keep inflation around 2% the mid point between their 1 -3% goal range. How the bank goes about this inflation control system is basically when demand is high it can push the limits of the economies capacity to produce. To counteract, the bank of Canada will increase interest rates to try and cool off the high rising pressure of inflation. Same way would work when there are low-growth periods in the economy the banks will decrease interest rates to stimulate the economy. These rising and dropping of interest rates can be further described in contractionary and expansionary monetary policy. 

Contractionary Monetary Policy 

This monetary policy decreases the money supply in an economy, by decreasing the money supply in an economy you also cause GDP to decrease. the decrease in money supply will lead to a decrease in consumer spending because of less money, less money to spend, a way this policy tries to help inflation rates.

This type of policy usually steps in when inflation rates are very high; when people have lots of money and prices are low. The governments goal is to then decrease this spending by decreasing the flow of money in the economy which can be done by 

1. Increasing interest rates will also increase the rates at which banks lend. When these rates are high, it is hard for people to obtain loans thus causing less spending

2. Banks have a reserve of cash for high demand withdrawals, when this reserve must increase, banks have less money to lend out. Causing less loans to be made.

Expansionary Monetary Policy 

Just how contractionary policy goes to decrease money supply, expansionary does the exact opposite and increases the money supply. A good example of this would be tax cuts, governments rarely use this policy because it can be risky causing high inflation. When there is a low-growth period they usually do this to start the circulation of money in the economy. Thus causing a shift to the right of the aggregate demand curve.

Compare and contrast Fiscal and Monetary Policy 

Now we are going to take a look at how fiscal and monetary policy differ and compare and how they work together to create price stability. 

Comparisons:

Easiest comparison they have is the fact they both are policies designed to counteract high inflation rates. They reduce the severity of recession as the economy needs to get back on its feet. Both have an big effect on demand ex. government increasing taxes and banks increasing interest rates. Side by side fiscal and monetary policies are designed so that recession does not occur. fiscal policies are set so the government can control spending without inflation occurring and monetary policy are set to control the supply of money and continue economic growth. 

Differences 

Besides that fact that fiscal policy involves government spending, and monetary policy is control of money supply there really isn't all that much difference. The only big difference about these policies is the tools they use to go about them. Monetary uses Interest rates,  reserve requirements, and open market operations where as fiscal uses taxation methods, and amount of government spending.

In my opinion 

I believe that monetary policy is an effective and efficient way of going about price stabilization. Using the tools their given, interest rates and the ability to print money I would like to see that they can keep the economy growing and not allowing another recession to occur. Thank you.

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