8 Monetary and fiscal policy

Since the mid–20^th century, US policy makers have attempted to use a mixture of monetary policies and fiscal policies to promote the twin goals of full employment and price stability. Monetary policies are those affecting the availability of credit, the supply of money and the velocity of its circulation, while fiscal policies are the government’s spending and taxing policies.

Money in the u.S. Economy

The quantity of money in an economy is central to determining the state of that economy – it affects the level of prices, the rate of economic growth and the level of employment. It is a medium of exchange that people will accept for their goods or services and a unit of account for prices or debts. In addition, it can be used like property or precious metals – as a store of wealth that people can save for future purchases.

Money in the United States consists of coins and paper currency. According to federal law, only the US Treasury and the Federal Reserve System can issue U. S. currency. All U. S. currency carries the nation’s official motto, “In God We Trust”.

Coins come in various denominations based on the value of a dollar: the penny, one cent or one-hundredths of a dollar; the nickel, five cents or five-hundredths of a dollar; the dime, 10 cents or ten-hundredth of a dollar; the quarter, 25 cents or one-fourth of a dollar; the 50-cent piece or half-dollar; and the one-dollar coin.

Paper money carries the printed signatures of the secretary of the Treasury and the treasure of the United States.

The u.S. Money supply

A nation’s money supply is based on either the production of a commodity or governmental fiat. Commodity money typically is based on valuable metals, particularly gold or silver. When a nation uses commodity money, the size of the money supply is determined by the cost of producing the commodity and the rate of production. During the late 1800s and early 1900s, U. S. currency was based on the gold standard, which is to say that the United States promised to redeem its currency for a specified amount of gold.

Fiat money, on the other hand, does not have intrinsic value. It has value because people are willing to accept it. To increase a fiat money’s acceptability, a government may make the currency legal tender, which means people are required by law to accept the money at its face value. Today the United States is on a fiat money system, in which the national government through its central bank, the Federal Reserve System, controls the money supply U. S currency is legal tender.

Yet the money supply in the United States consists of more than just coins and paper money. Checking account deposits are considered a form of money because they are spent when people write checks. In fact, in the United States, about three-fourths of all payments are made by check.

Economists measure the money supply in several ways that differ according to which assets are included in the measurements. One measure includes deposits in all interest-bearing accounts that can be used like checking accounts. Another includes savings accounts that cannot automatically be converted to make purchases. Banks can require advance notice of withdrawals from these accounts.

When the money supply increases, people have more money to spend, and demand for goods and services increases. As demand increases, businesses hire additional workers to increase output. This is an economic growth scenario. But, if output does not keep pace with demand, prices increase. When prices rise continuously, inflation results. This tends to cause problems for people whose incomes do not increase at a rate consistent with inflation.