The Driving Forces Behind Our Economy

Our government today needs the proper tools to maintain a stable economy. Many approaches have been made in earlier times, and flaws soon flood those systems, for instance, the reliance of the economy on gold. After the Civil War in the 1860’s, greenbacks were introduced into the economy. Money however, was backed by gold, and thus, problems came in the way of that plan. Until after the great depression, a period during which business, employment, and stock market values decline severely or remain at a very low level of activity, economists such as John Keynes’ ingenious insights led to the development of today’s Monetary Policy. Government, or monetary authority, such as the central bank, manages the supply of money, and trade in foreign exchange markets.

An example of economic growth would be for instance, when the money supply increases, people will have more money to spend. That would result in an increase in demands for goods and services. To keep up with the change in demand, businesses would have to employ more people so that they could meet those demands. However, inflation can happen if the balance is lost and the total output falls short of the total demand. Prices would skyrocket and many people would not feel as though the cost of living is relatively proportional to their salaries.

However, when the economy does not grow, and unemployment is high, along with inflation, that is called stagflation. Stagflation is a portmanteau of the words stagnation and inflation. Scientists agree that in a five-year period, one cannot heal stagflation simply by applying change in the monetary of fiscal policy. However, the inflation part of stagflation can be annihilated by reducing the money supply, which in turn would worsen the recession, the decline in economic activity lasting more than a few months, and thus can be developed into depression, a more severe downturn.

The Federal Reserves System, the central bank of the U.S., and the U.S Treasury control the supply of money. The Federal Reserves Banks issue notes $1, $2, $5, $10, $20, $50, and $100. The U.S Treasury issues notes in multiples of $100’s. They control the economy in two ways, using expansionary and contractionary policy. Expansionary policy increases the money supply, and is traditionally used to combat unemployment, provided interest rates, the rate at which money can be borrowed and the total supply of money, are lowered. In contrast, contractionary policy is used to raise interest rates in combating inflation. One way that today’s leaders use the monetary policy to stabilize the economy is lowering tax, as Mr. George Bush did for the 1% upper salaries.

Fiscal Policy is quite different from Monetary Policy. For instance, it involves good consumption as well as import and export. This Policy attempts to influence the economy by controlling the changes in spending. Government spending and taxation are the two main instrument of that policy. The three possible outcomes when fiscal policy is applied are neutral, expansionary, and contractionary. Neutral stance is when government spending equals its revenues, thus a balanced budget. Expansionary stance is when government spending increases as revenues remains the same, or decreases. Moreover, contractionary stance is just the opposite of that.

Both monetary policy and fiscal policy play an important role in the United States’ economy. Today, the fight to stabilize the economy remains. For instance, consider Bush’s proposed tax cut. Although the economy is in a quasi-recession, Bush just will not declare recession, according the Forbes Magazines. Moreover, with the U.S. currency losing its values before other currencies, interest rates are climbing the economic latter.