tically) borrow from the reserve banks. The discount rate is not used as frequently as it was in the past, but it does serve as an indicator to private bankers of the intentions of the Fed to constrict or enlarge the money supply. The monetary policy is a good way to influence the money supply, but it does have its weaknesses. One weakness is that tight money policy works better that loose money policy. Tight money works on bringing money in to stop circulation, but for loose policy to really work, people have to want loans and want to spend money. Another problem is monetary velocity. The number of times per year a dollar changes hands for goods and services is completely independent of the money supply, and can sometimes contradict the efforts of the Fed. The benefits of the monetary system are that it can be enacted immediately with quick results. There are no delays from congress. Second, the Fed uses partisan politics, and so has no ties to any political party, but acts in the best interests of the U.S. Economy. The second way to influence the money supply lies in the hands of the government with the Fiscal Policy. The fiscal policy consists of two main tools. The changing of tax rates, and changing government spending. The main point of fiscal policy is to keep the surplus/deficit swings in the economy to a minimum by reducing inflation and recession. A change in tax rates is usually implemented when inflation is unusually high, and there is a recession with high unemployment. With high inflation, taxes are increased so people have less to spend, thus reducing demand and inflation. During a recession with high unemployment, taxes are lowered to give more people money to spend and thus increasing demand for goods and services, and the economy begins to revive. A change in government spending has a stronger effect on the economy than a change in tax rates. When the government decides to fight a recession it can spend a large amount ...
