Monetary policy and fiscal policy are in the same family. However, the use of monetary policy is dates back centuries, whereas fiscal policy started to incline around the Great Depression. Each policy has its positives, and each have consequences as well. Fiscal Policy is needed to regulate spending, control inflation and monitor taxes.
The main source of income for the federal government is income tax. Each year the President creates a budget and proposes it to Congress. This proposal is usually set in February and isn’t usually completed until September or later. There are several steps to complete the process. Before the Great Depression, fiscal policy was used primarily to borrow money. President Hoover thought the government should take responsibility for this depression (De Long, 1998). This was when it surfaced to curb inflation and help the unemployment status with the use of tax control. By doing this, increased taxation had a positive effect on the economy. Using funds directly where needed helps target the problem.
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The positive of monetary policy, is that it can be implemented very easily (Hayes, 2015). It is meant to control the amount of money that is available to either make more money available to spend when the demand is low, or less money to spend when inflation increases. “If inflation starts to increase to a worrisome rate, the central bank will enact restrictive monetary policy to tighten the money supply and decrease the money flow” (Hayes, 2015). Another positive, when rates are low in order to increase inflation, you have the chance for getting a lower fixed rate. This can also be a consequence as well. There is the risk of over borrowing when rate are very low. Another consequence is that it may have a reverse effect. If too much money is circulating and people are spending, value may increase and in turn raise