Monetary and fiscal policies

Fiscal policies influence macroeconomic stability by impacting Aggregate Demand, and subsequently, spending, either by government spending or taxation policies. Adhering to the process of economic stabilization, monetary and fiscal policies are used in response to economic conditions. Such solutions of stabilization and economic growth require appropriate combinations of both monetary and fiscal policies. Responses of the United States economy to monetary policy shocks have been cited to depend on the economic and business cycles. The economic conditions discussed are recession and boom. During recession, a nation is often producing below its GDP level, and the engagement of expansionary fiscal policies stabilizes the economy by increasing Aggregate Demand, increasing spending and ultimately increasing the country’s GDP levels. The main reason for employing these expansionary fiscal policies during periods of recession is to increase employment levels, which is an indicator of economic growth and stability.