Macroeconomics - Term Paper - Essay Example

In the regulation of the money in circulation, central bank makes adjustments to the interest rate that entails the price of borrowing money. This paper keenly discusses fiscal and monetary policies theories and application. Fiscal policy In their efforts to regulate spending and maintain taxation at an affordable level, governments emulates three types of fiscal policies. The first one is neutral fiscal policy. This type of policy is adopted when the economy is in equilibrium. One of the key aspects of neutral fiscal policy is that all the fund that the government uses to establish projects such as roads, factories, ports among others, is full obtained from tax revenue (Hansen 34).

Another type of fiscal policy that government can use to achieve economic development is the expansionary fiscal policy. This entails a situation whereby government spending exceeds tax collected from the residents. This will mean that governments must look for donors to fund them so that they are able to maintain their economy at a competitive level. The policy must be looked keenly to make sure that funds borrowed from the donors are not diverted to other unplanned project .The third policy is contractionary fiscal policy. . The federal government controls how the money is shared according to the financial year and how they have planned for the budget.

The budget must be gone through by the stake holders that include president and the congress. The two bodies must work together so as to come with a comprehensive report that is going to make life bearable to its citizens (Larch and Nogueira 46). The president makes sure that the proposed budget is passed to the congress so that they can decide how much money the government is going to spend on public needs for example, the issue of security is a problem world wide and health care .On the other hand expansionary fiscal policy is commonly used by the federal government to make sure that their business problems are stabilized.

Another application area in expansionary policy is the issue of unemployment to its citizens. The unemployed high number of people has to borrow money and return the same money with low interest. In contrast, contractionary fiscal policy is mainly used by the central bank or the finance ministry to make sure that the rapid economy growth of a country is put under control. This means that the government must come up with the measures to control it. The government has to increase the interest rates, the central bank then regulates the money their customers are going to deposit and the notes the other bank are going to hold.

Monetary policy Monetary policy refers to the process by which the government through central bank regulates the money supply to its citizens with aim of controlling price fluctuations (Heyne et al, 19). This means that the government must make sure that the prices of commodities are stable. The government must still ensure that the interest rates and exchanges rates are guarded fully against