Monetary and Fiscal Policy of the US Government

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Table of Contents

Monetary Policy
Fiscal Policy
Works Cited

Monetary Policy

Open Market Operations

Open market operations belong to the number of tools that are supposed to be effective for the implementation of new monetary policies. The discussed operations include purchases and sales of valuable securities initiated by central banks in different countries. In general, two important types of open market operations are distinguished. In the United States, permanent operations conducted by banks are usually regarded as a tool allowing them to achieve long-term goals whereas temporary ones are used in unstable situations to achieve short-term goals. In terms of specific features of open market operations in the United States, it needs to be said that the Federal Reserve actively uses the so-called repos or sale and repurchase agreements in order to increase the money supply.

Among other types of operations that are widely used, there is an overnight repo acting as a tool to modulate the level of bank reserves. As for the recent events related to the discussed area, it is known that the Federal Reserve focused on purchasing “longer-term Treasury securities at a pace of $45 billion per month” in 2013 when MEP program aimed at encouraging economic recovery in the United States was completed (Open Market Operations par. 16). The results of this decision, as suggested by the Federal Reserve, would reduce the pace of further purchases in case of significant improvements related to the labor market and inflation rates. In the end, the Federal Open Market Committee has managed to gradually reduce the volumes of asset purchases.

Federal Funds Rate

Federal funds rate presents the interest rate used by banks in the United States in order to lens resources to other banks. Such operations usually present short-term lending and overnight credits are a common method of resource exchange between banks. Federal Open Market Committee is a body that is responsible for all the decisions related to changing federal funds rates. Discussing the importance of federal funds rates for the economic development of the United States, it is necessary to mention that changes related to this factor have a significant influence on the situation in different countries. For instance, the statistical data indicating changes related to federal funds rates in the period from 2006 to 2016 shows that a course for the establishment of higher rates was set about four years ago (Federal Funds Rate Level in the United States from 2006 to 2016 par. 1).

There was a significant decrease in the federal funds rate during the period of a global financial crisis with the lowest rate in 2011. Two years later, the federal funds rate started to increase and this fact is associated with important consequences. Among the most important ones, there is the attractiveness of the United States for foreign investors. In fact, the recent growth of the federal funds rate has encouraged an increased number of investments in the country. At the same time, this tendency is inextricably connected with the decreasing attractiveness of countries with developed economies for foreign investors.

Fiscal Policy

Taxes

The so-called “tax relief” proposed by George W. Bush was one of the most important parts of his plan, and income taxes were significantly reduced two times – in 2001 and 2003 (Yuhn and Bennett 1623). The decision to allow citizens to spend more money on their needs and the needs of their families instead of paying high taxes was caused by a combination of factors including the difficult social situation after the terrorist attacks and a series of challenges. The initiative involving the tax relief was supposed to improve the quality of life of common citizens, encourage further development of small business, and increase GDP. The changes were meant to improve the situation for Americans belonging to the middle class. The project was widely criticized as many people voiced an opinion that it would have positive consequences only for Americans with high incomes. In reference to the practical effects of income cuts, many researchers prove that the reforms did not have a significant impact on marginal investment incentives and, therefore, the initiatives cannot be called successful. At the same time, there was an unstable growth of GDP when the initiative was implemented. Therefore, the goals that tax relief was associated with were not achieved after the implementation of the new tax policy.

Government Spending

Government spending can be defined as the use of money to fulfill the most important functions of a government such as protection, creation of appropriate socio-economic conditions for citizens, and conducting the international activity. Nowadays, there is a range of situations when governments are criticized because citizens know a little about government spending in their countries and the purposes for which their money is used. Discussing this topic, it is important to mention one of the initiatives proposed by Barack Obama during his presidency.

In 2014, Obama voiced his opinion on factors that could be detrimental to the attitude of citizens to their government – considering the lack of information on government spending, he insisted on the implementation of new methods of reporting to ensure an increased government spending transparency (The Data par. 12). The DATA Act signed by the ex-President was supposed to provide common taxpayers with access to the information demonstrating the way that their money is used. According to this act, the U.S. Government is supposed to use its website to provide detailed reports related to spending on a regular basis. The act has a lot of positive consequences as it increases citizens’ awareness of operations conducted by the U.S. Government even though the information increasing financial risks for people or organizations cannot be disclosed.

Works Cited

“Federal Funds Rate Level in the United States from 2006 to 2016.” Statista, 2017. Web.

“Open Market Operations.” Federal Reserve, n.d.. Web.

“The Data.” USA Spending, n.d.. Web.

Yuhn, Ky-Hyang, and Christopher S. Bennett. “A Note On The Bush Tax Cuts: Did They Succeed In Stimulating Business Investment?” Macroeconomic Dynamics, vol. 20, no. 6, 2016, pp. 1623-1639.

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