Difference between Fiscal Policy and Monetary Policy and Their Relationship to the Federal Budget - Assignment Example

Budget and Finance Describe the difference between fiscal policy and monetary policy and their relationship to the federal budget. Financial policy makers argue that there are two unique forms of tools used to manipulate a country’s economy: monetary and fiscal. Monetary policy refers to the actions taken by central banks to accomplish macro-economic policy objectives such as full employment, price stability and steady economic growth. The congress in America created price stability and maximum employment as macro-economic objective aimed at boosting the Federal Reserve which is also known as a dual mandate. The congress concluded that the operations of the monetary policy should not be politically influenced unless the objectives are overarching. This resulted in a unique decision where the Federal Reserve was made an independent agency of the central government. A fiscal policy defines the spending and tax policies of the central government .The administration and the congress are assigned the task of determining decisions of the fiscal policy (Charles, 2012). The Federal Reserve does not influence the fiscal policy in any way. The executive and legislative branches of the federal government govern the fiscal policy. In America for instance the congress and the office of the treasury secretary pass laws. Policy makers usually use fiscal implements to manipulate demand in the American economy. For example: when handling taxes, the government may reduce taxes if the demand is low thus automatically increasing the amount of disposable income therefore, stimulating demand. When handling spending especially when inflation is high the government can seclude itself from battling for resources in the open market of both services and goods. This is retrenchment policy that can reduce prices. Conversely, in case of an aggregate demand or recession where there is an increase in government expenditure in infrastructural schemes this may result in more employment opportunities and higher demand (Lawrence, 2010). The fiscal policy therefore plays a major role in matters of the federal budget due to the effective duties done to cut expenditures or increase taxes to balance public debt levels. The monetary policy which is the second tool is governed by the central bank. In America, this is actually a Federal Reserve. The federal chairman is nominated by the national government and an oversight committee for the Federal Reserve is present in the congress. Due to the level of independence it has it can utilize any measure for the purpose of accomplishing its dual mandate which involve low employment and stable prices. Some illustrations of monetary policy involve: Interest rates that are basically about the price of borrowing. By manipulating the rates of interest the national bank makes it harder or easier to borrow money. If money tends to be cheap a lot of economic activity and borrowing is noted. For instance, entrepreneurs will find projects not be viable if they borrow cash at 5% but the rate is 2%. Lower rates also discourage saving and induce individuals into spending rather than saving since they acquire petty returns on their earnest savings (Kaplan, 2011). Reserve requirement which is the second example deals with the cash reserve ratio .The bank is required to hold onto a specific percentage of the deposits in their reserve for the purpose of ensuring they are ready to meet the withdrawal needs of their depositors. The possibility of all depositors making a simultaneous money withdrawal is almost close to 0% so the cash reserve ratio is usually close to 10%. The bank is then allowed to lend out the remaining 90 percent. The fed therefore can limit and regulate the level of lending in an economy by manipulating the CRR Necessary for banks therefore the money supply too (Sargent, 2010). The monetary policy impacts the federal budget in a huge way since the government has to finance expenditures through debt, taxation and printing money. This fact definitely intertwines monetary policy into the national budget. Importance of ethical guidelines in public budgeting and accounting and provide major guidelines utilized by government budget offices Recent events have reinforced the necessity for accounting practitioners to act and behave in an ethical manner and portray an adorable financial performance of the firms they work for. In the contemporary world the sheer scale and complexity of many commercial transactions has led to the need for a fair and transparent assessment of the value and obligations of the transactions. Another reason why an ethical accounting behavior is vital is because a vast majority of individuals expect morally upright accountants with proper decision making skills. The decisions made by accountant’s impact many people and their activities they contribute to such as stake holders in different companies who are active investors or work in the company. On a broader scope decisions and actions made by accountants impact the lives of many individuals (Neil, 2012).The statements are not made to glorify the profession but to highlight the importance of applying high ethical principles in the occupation. The global accounting standard board has developed a principle for certified accountants which are known as the international financial reporting standards. More than 115 countries use the IFRS including Australia, European Union and Hong Kong. The generally accepted accounting principles in United States are known as the (GAAP) are the principles governing financial accounting in the nation. Critics have stated that the principles are responsible for the number of scandals suffered in the United States. The approach that has a principle centered approach requires a lot of professional judgment unlike the rule centered approach. Study shows that principle centered approaches can help in both financial reports and assist an auditor to deal with a client who is under a lot of pressure (Kaplan, 2011). This would result in transparent and fair financial reports. Incidents in recent us history where three guidelines have been violated IFRS is mostly based on “relevance, understandability, materiality, comparability and reliability. IFRS has not been adopted by all the nations so the practices are not viable in the global domain. USA for instance has not adopted IFRS fully which makes matching rules and principles difficult. The securities and exchange commission urged the USA to shift from using GAAP to the IFRS before 2015.This reluctance to shift from GAAP to IFRS has seen numerous accounting scandals in USA that have resulted in bankruptcy , fraud charges and the closure of accounting firms and companies. The scandals resulted from bribery, deceptive financial analysis and creative accounting. Various accounting firms had problems with fraudulent accounting deeds. They include Phar-Mor, Hand Bank, AIG and WorldCom. The biggest scandal was a about Enron which is a multinational company which for Many years had not indicated fair or true review of their financial reports. When the arm of the government finally caught up with them not only did they loss over 85,000 jobs due to bankruptcy but also over $25billion shillings. Self-interest, misleading professional judgment, ethical insensitivity, ill-culture, inadequate knowledge about advocacy threats are among the listed factors that lead to the biggest financial scandal (Kaplan, 2011). Question 3 The central government offers a variety of grants with each grant have a unique way of operating and awarding. Project donations are awarded in a very competitive manner since they are the commonest form of grants. A vast variety of the grants are found in technology development, education, scientific research, healthcare, and arts kind of assistance. An example of an education grant in America is the federal Pell grant. Formula grants are another form of federal funds that offer aid as specified by the law. Examples include grants to families with needy kids and the act that deals with job training partnership and finally the work incentive scheme. They can further be classified as either block or categorical. Categorical grants are spent for barely defined reasons and recipients in most instances must fit a certain share of the federal funds. Block grants mingle categorical grants into one single scheme. An example of the grant is the drug abuse, alcohol, service block, and mental health grant (Sargent, 2010).The earmark grants are among the Federal grants that are very controversial due to the political lobbyists surrounding them. In addition direct financial aid, what other intergovernmental devices are employed In most cases direct financial aid involves money but the government also offers a nonfinancial form of assistance; this includes the donation of goods and property or the exchange and sale of the goods. The federal government can donate drugs, food, land, equipment and buildings. Specialized services are also enlisted on the non-financial grants where the federal personnel offers quality services such consultation, counseling and advice. Distribution of technical information is another form of aid offered through libraries and clearing houses. Training that involve instructional activities is another aid that is very beneficial especially to the youth who are young aggressive and thirty for knowledge. Investigating complaints through investigating the violation or misconduct in handling federal procedures, policies and statutes is another form of aid (Neil, 2012). Describe changes occurring on the intergovernmental fiscal landscape A silent but thoughtful revolution in intergovernmental fiscal landscape has been witnessed where massive changes in fiscal aid flow have been observed from both state and federal governments. Critics specify that the change is as a result of a vital reordering of fiscal federalism and intergovernmental relations. The change has been characterized by significant alteration in the stability of power within the federal government and enormous changes within the intergovernmental revenues. The change has made local governments to be self-reliant on the revenue they generate (Lawrence, 2010). A new federalism era almost similar to that experienced in the Reagan era has been also noted clearly defining the departure from former trends and practices. What course do you expect for intergovernmental relations to take in future? With the mega alteration of political power experienced within the federal government all these revolutions can only be defined as political flows and ebbs. Recent changes only reflect short term radical and political judgments and strategy preferences instead of fundamental reshuffling of intergovernmental power. In future the intergovernmental relations which are an essential part of the fiscal landscape may recede in importance. The state governments in my opinion will respond to the revolution by reappraising spending priorities (Charles, 2012). The changes are like a mirror clearly reflecting larger trends to be seen in the future on intergovernmental relations. Grants from state authorities to local authorities their distribution, size and composition will indicate communal policy priorities and power balancing in the future. What are capital budgeting, basic processes involved in capital budgeting, basic processes involved in capital budgeting including systems for making long term investments and the financing of long term assets? Capital budgeting refers to the process where a firm makes a decision on the long term investment to implement. Financial budgeting projects such as prospective long term investments are projected to make cash flows for several years. The verdict of either rejecting or accepting a cash budgeting project heavy relies on the cash flow analysis made by the project and the cost of the specific project. They are few steps taken to achieve capital budgeting such as decision rules they include: Payback period Internal rate of return(IRR) Net present value (NPV) These decisions should also satisfy the criteria listed below Cash flow projects must be considered The time value of cash should be considered Correct decisions should be made when choosing similar exclusive projects. The system used to make long term investments and finance long term capital assets usually involves the company making operational objectives and long term financial strategies for the future activities and size of the company. These include product mix, products, markets, services, market share, quality of sales, volume of sales, capitalization, volume of sales, degree of integration and horizontal integration, development, research, private or public ownership, benefit packages, advertising campaigns and training (Neil, 2012). Types of assets included among capital expenditures The sum of capital expenditure an enterprise can have depends on the type of industry or firm it occupies. Examples of the most capital intensive businesses include telecom, oil and utilities. In accounting an expense is viewed to be a capital expenditure if the asset is a freshly bought investment or capital asset that improves the life of a pre- existing capital asset. If the expense turns out to be a capital expenditure then definitively it has to be capitalized. This will also require the enterprise to spread the cost of expenditure over the life of the asset. However, if the asset maintains the asset in its current condition the cost is fully deducted in the financial year of expense (Charles, 2012). Other critics claim that an increase in fixed assets of the entity result in capital expenditure therefore clearly indicating that fixed assets and capital assets are included in capital expenditures. References Charles, I. (2012) .Fiscal Policy and Monetary Policy the Initiative on Global Markets. New York City:University of Chicago press. Lawrence, M. (2010).Credible Commitments and Monetary Policy after the Crisis. Zurich, Switzerland: Swiss printing press. Kaplan, J. (2011). Ensuring Sound Monetary Policy in the Aftermath of Crisis .New York: Prentice Hall press. Sargent, T. (2010). Where to Draw Lines: Stability versus Efficiency. NewYork: Business Expert press. Neil. (2012). Some Unpleasant Monetarist Arithmetic. Cambridge: Cambridge University press. Read More