The management of the money supply and interest rates is what is known as monetary policy, The Federal Reserve System (the Fed) was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington, D. C. , and twelve Federal Reserve District Banks.
The Congress structured the Fed to be independent within the government-that is, although the Fed is accountable to the Congress, it is insulated from day-to-day olitical pressures, this reflects the conviction that the people who control the country’s money supply should be independent of the people who frame the government’s spending decisions, Monetary policy has two basic goals: to promote “maximum” output and employment and to promote “stable” prices.
The point of implementing policy through raising or lowering interest rates is to affect people’s and firms’ demand for goods and services, the Fed’s can stimulate the economy out of a recession but can’t stimulate the economy all the time because the Persistent attempts to expand the economy beyond its long-run growth path will press capacity constraints and lead to higher and higher inflation, without producing lower unemployment or higher output in the long run.
In other words, not only are there no long-term gains from persistently pursuing expansionary policies, but there’s also a price-higher inflation. High inflation can hinder economic growth; for example, when the inflation is high it intends to vary a lot which makes people uncertain about what inflation will be in the future. That’s why the Federal Reserve is important so they can arrange and make sure that economy is on the right track and growing at the right rate without creating any depression.
As for the fiscal policy it’s that part of government policy which is concerned with raising revenue through taxation and with deciding on the amounts and purposes of government spending. A fiscal policy is more likely when inflation is high, a contractionary fiscal policy reduces the amount of money in the economy available for purchasing goods, thus decreasing spending, demand, and, ultimately, pressure on prices.
Decisions on fiscal policy are inevitably influenced by political considerations, such as beliefs about the size of the role that governments should play in the economy, or the likely public reaction to a particular course of action. Few governments will find it easy to raise taxes or to decrease funding for programs that have strong support from the public, such as social security or defense. The fiscal policy has a major influence on businesses and business people, employees and the entire economy will feel the effect eventually as the business people decides whether to hire more people and invest more money.