How do Monetary Policies Combine in the Economy

bad-economyHaving looked at how it is that both monetary and fiscal policies have an individual ability to control the supply of money within an economy, and therefore the short term demand of the markets themselves, we can now look at how the individual combinations of these two policies can impact the economy as a whole in terms of interest rates, currency values, demand, and private business growth.

Expansionary Fiscal and Monetary Policies

By implementing both an expansionary monetary and fiscal monetary policy, the government is taking all measures available to increase the market’s access to money. This is accomplished by both directly stimulating the market, and improving the ability of institutions to lend. The results of this sort of strategy will be that interest rates will generally lower due to the ease of lending, while demand will increase, and private business will expand to meet that demand. From there, currency values will generally increase as foreign investors pay to invest in the growing market, and for the right to borrow the new funds.

Contractionary Fiscal and Monetary Policy

Opposite to a fully expansionary policy, this strategy will focus on slowing down the growth of the economy as a whole. This is accomplished by tightening the ease at which a lender can provide funds, and by reducing public spending. The end result is that borrowers will be encouraged to save instead of spend, which will therefore create a decline in demand, and therefore a decline in private business. From there, the currency value will likely decrease, as investors seek investment environments with greater opportunities.

Expansionary Fiscal Policy and Contractionary Monetary Policy

Such a policy will generally entail providing strategic fiscal benefits to specific aspects of the economy, such as through tax cuts, or subsidies, while restricting the growth of the money supply in terms of the accessibility of credit. An example of such a policy would be when a government provides cheap loans to financial institutions, but then restricts their ability to lend out funds so as to ensure that the financial integrity of these institutions is secured.

The end result is that GDP will increase, and aggregate demand will likely creep up depending on the kind of fiscal policy enacted. However, despite both of these actions, it is important to remember that consumers themselves will be restricted, because they will only really be able to make purchases using money that they are currently earning, as opposed to borrowing funds. From there, currency values will not have a definitive directional movement.

Contractionary Fiscal Policy and Expansionary Monetary Policy

This blended strategy will result in a combination of decreasing interest rates and a reduced GDP from lower government spending. This means that the government is fortifying its own financial position, while stimulating demand from consumers by improving their ability to borrow funds. This will increase private consumption, and private business, to the point at which it might even make up for the decline in GDP caused by the lower spending.

However, because of the way in which the new monetary policy will likely cause inflation, the currency value will likely decrease over time if the private business growth cannot make up for the degradation.

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