Answer to Question #82795 in Macroeconomics for Marija Borcic

Question

5. Compare and contrast fiscal and monetary policies
Hint: Do the comparison in a table so it looks neat and organized. Elements to discuss include
(but not limited to) the objectives of each policy, the tools used, the implementing agencies,
limitations of each, etc.
6.
a) What is the quantity theory of money?
b) According to the theory, what would happen to prices and output if the Fed rapidly increases
the growth rate of money supply? Show on a graph. Explain both the short run and long run effects

Answer 1

5. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks such as the U.S. Federal Reserve. Fiscal policy is the collective term for the taxing and spending actions of governments. [1]

6.

a) Quantity theory of money states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. [2]

b) According to the theory, prices and output will increase according to increase in aggregate demand if the Fed rapidly increases the growth rate of money supply? But in the long run the output will decrease back according to the leftward shift of the supply curve.

Source:

1) https://www.investopedia.com/ask/answers/100314/whats-difference-between-monetary-policy-and-fiscal-policy.asp#ixzz5WOwBYf6w

2) https://en.m.wikipedia.org/wiki/Quantity_theory_of_money