Monetary and Fiscal Policy - Political environment, Business Environment Video Lecture | Business Environment - B Com

well hey there
in this video we're going to talk about
the difference between monetary and
fiscal policy and you're likely familiar
with these two concepts or at least
heard of them two of the more important
concepts in economics and the focus
really is on trying to improve the
health of the economy now the government
is obviously interested in certain
indicators as GDP and unemployment rates
and consumer spending in a variety of
others
so the focus here really is on trying to
move those metrics in a way that
represent the economy is improving
so the focus is very similar we're
trying to improve the health of the
economy
now the means to which we do that is how
these two policies different we pull
different levers to try and help out and
improve economic conditions again as
reflected by a variety of economic
indicators such as unemployment gdp
consumer spending to name a few
so I don't want to get it to the
intricacies surrounding the specific
tactics that are utilized but i do want
to focus on the kind of the general
differences between these two very
important economic policies
so the first thing we're going to talk
about is monetary policy now monetary
policy involves using two specific
levers to try and improve the condition
of the economy
the first of which is what we call
interest rates
and the second is known as the money
supply now
interest rates represents both what
banks essentially charge on loans but
also what we receive an interest so if
you have a savings account or a CD the
money that's paid on that account
largely is affected by the prevailing
interest rates which although aren't set
entirely by the Fed in some way they
certainly influenced them through the
purchasing of securities and those types
of things
so the general idea is by lowering
interest rates
what the Federal Reserve can do is
essentially make it more advantageous
for people to get loans and then of
course spend them which injects money
into circulation which of course gets
invested into hiring employees and
purchasing goods and its kind of this
kind of cyclical kind of event that
takes place so interest rates are really
important you probably are familiar with
a couple of specific interest rates
things like what we call the discount
rate which represents the actual money
that is loan to banks so the federal
reserve of course one of their major
roles is the kind what we call the
bankers Bank and so if a bank needs to
get over night monies they can go to the
Federal Reserve and they can go to
what's called the discount window and
then pay whatever prevailing rate that
is currently it's relatively I think
maybe a quarter to half a percentage
point which can again kind of reflects
the idea that i'm trying to as the
federal reserve
you know I want to facilitate spending
if I want to pull back on spending if
I'm concerned about potentially
inflation and the economy is getting
growing too quickly then I can of course
raise that interest rate the second
interest rate will be what we call the
Fed Funds rate
and this particular rate although it
isn't set specifically by the Fed
they've set what's called a target and
the Fed Funds rate you're probably
familiar is the rate that banks can loan
to one another so banks will usually
keep reserves with the federal reserve
will with at least their federal reserve
branch
so for example at least here because
we're in California our closest federal
reserve branch in San Francisco so banks
in this area and throughout a lot of the
West will hold reserves with the Federal
Reserve they can keep that money on hand
and the fed will actually pay an
interest rate to hold those monies
but what the banks can do is they can
lend money to one another for a
specified interest rate again this is
kind of you know that the bank's agree
to on themselves
however the Fed does set a target on
what is considered to be reasonable as
well so that's interest rates the other
aspect is the money supply or the amount
of money that's in circulation
so what the Federal Reserve can do is it
can essentially take the amount of money
so say this represents 100 million
dollars which is very small
typically with the Fed we're talking
about billions and and really they have
trillions of dollars on their books but
just as an example let's say there's a
hundred million dollars in circulation
this means that the amount of money
available to consumers like your eye is
100 million so that's how much we can
access through banks remember banks of
course our kind of the distribution
mechanism for the Fed when the Fed wants
to create money it doesn't actually
physically create it
it simply transfers money on to the
books of banks banks and in turn will
make loans and then of course we can get
loans and then spend that particular
money
so in this case what the Fed can do with
the supply of money is it can go ahead
and it's going to go ahead and increase
this amount and so maybe it increases it
an extra 25 million dollars
well this is now an extra 25 million
dollars it's available in circulation
for people like you and I to acquire in
terms of loans filtered down through the
bank's we go into our local bank or
credit union apply for a loan and then
we can take these monies and then spend
them on homes cars computers
whatever good that we would that we want
to obtain so this is a really
interesting thing because by increasing
the supply of money
the Fed essentially increases the
availability or the supply of that which
in turn gives people the opportunities
to acquire those funds if they get spent
of course that's revenues for businesses
and if enough of that takes place than
businesses have needs to hire in those
types of things
so those are the two policies they're
related specifically into monetary
policy we can talk more about specifics
in a future video now in fiscal policy
we're actually looking at accomplishing
the same thing as monetary policy what
we do it differently now we're monetary
policy is controlled by the Federal
Reserve fiscal policy is controlled by
the executive and legislative branches
so in this case you know the legislative
branch can recommend policies and those
types of things we have kind of that
checks and balances system so one can't
do without the other so fiscal policy is
going to take the two forms one
it's going to take the form of
government spending and two it will take
the form of Taxation
so government of course is responsible
for two things one the money that it
spends government has a huge budget and
then it will in turn use that budget to
support certain areas of the economy
that it thinks needs to be supported
taxation of course represents what we as
consumers will pay on our taxes but the
the Fed or the government can also use
this as a way of giving increased money
is in the hands of individual consumers
so we will of course spend it
one thing that you're probably familiar
with is at least in the US we have a
very terrible savings rate so if we get
money the chances of us saving is very
slim
I believe it fluctuates but it can range
anywhere from 12 maybe two percent it
increased a little bit after the latest
recession and await just as people were
trying to kind of improve their personal
balance sheets but it usually hovers
around that percentage and so that shows
you that if you got a hundred dollars
for example you would save maybe a
dollar to the rest of it you're going to
spend the government knows this and
understand that if we give money to
consumers the chances of them saving it
is going to be very very low
so let me give you an example of this
government spending makes sense because
the government can in turn go and buy
something from particular industry and
then can inject money in the economy
that way
one interesting thing that would make
the distinction of is under fiscal
policy or merely talking about a
redistribution of existing monies
so we're not creating new money monetary
policy involves the creation of new
money and that big as the example that I
gave you before is the Federal Reserve
engages in a transaction digitally puts
money on the books of banks that didn't
exist before and then in turn that's
filter to the banks with fiscal policy
we're not creating new money we're
merely taking it from a source so if we
tax one group of consumers and then we
re distributing it as a way of improving
economic development so that's an
important distinction that you get
between the two
now one thing you can do with taxation
for example is what we call the payroll
tax holiday
and this took place several years ago
and it was in response to economic
recession of 2008
I believe this one into effect in
2009-2010 and so what happened is if you
look on your payroll taxes you pay a
social security tax of 6.2 percent so
what the what the government did is it
decreased this tax rate and so instead
of paying six point two percent
we paid I believe you paid for . to
instead so it was a two percent savings
so by doing so what happened was
everybody's paychecks you probably
noticed this got a little bit bigger and
you didn't get a raise but it was less
in taxes and so by doing so what the
government is doing is using the levers
of taxation for the purpose of you know
reinvesting money into the economy
because if people slowly see that they
have more monies
they're going to spend more in terms of
you know essentials and groceries and
those types of things at least that's
the general logic behind it
if it's a larger sum of money people
would be more likely to save it
now you can argue that maybe this policy
wasn't great but this is an example of
fiscal policy that was of course
lessening social security taxes going in
and you can make the argument of course
that maybe we should be paying into
Social Security given its not
essentially the strongest thing
financially but that's an example of a
fiscal policy the payroll tax holiday of
2009
so that's the two differences so the key
things again remember that both of them
are attempts to influence the economy in
a positive way they do a little bit
differently
monetary policy specifically with
interest rates in the money supply
fiscal policy specifically with money
that government spends as well as
taxation
but the intent is very similar we're
trying to take money put it in the hands
of those people that are going to spend
it so they can spend it goes into
businesses businesses have no demand for
goods and services they hire now people
have more money and so you get kind of
this cycle that takes place
but the government tries to use this as
the starting point to create that cycle