Discuss the differences in philosophy, key actors, and tools of fiscal and monetary policy. Should the federal government give preference to one or the other? Why or why not?

Question

What will be an ideal response?

Answer 1

Answer: An ideal response will:
1. Discuss the difference between fiscal and monetary policy, noting that monetary policy affects the money supply and is primarily used as a tool to manage inflation, and fiscal policy is related to taxing and spending and is primarily used to address issues of unemployment.
2. Analyze the different origins of fiscal and monetary policy, noting that Congress has primary responsibility for the fiscal policy, while the Federal Reserve Board has the primary responsibility for monetary policy.
3. Compare the different tool sets of both policies, including monetary policy efforts at managing interest rates to either expand or contract the money supply to stimulate or slow down economic growth, and fiscal policy efforts to use taxation and government spending rates to help stimulate investment and employment.
4. Assert that under a specific set of circumstances, one policy menu is preferable to the other, depending on the government's interests, illustrating this through specific examples such as the recent stimulus package to reduce unemployment or the decision by the Federal Reserve to keep interest rates low to encourage borrowing.