nks. The discount rate is not used as frequently as itwas in the past, but it does serve as an indicator to private bankersof the intentions of the Fed to constrict or enlarge the moneysupply.The monetary policy is a good way to influence the moneysupply, but it does have its weaknesses. One weakness is that tightmoney policy works better that loose money policy. Tight money workson bringing money in to stop circulation, but for loose policy toreally work, people have to want loans and want to spend money.Another problem is monetary velocity. The number of times per year adollar changes hands for goods and services is completely independentof the money supply, and can sometimes contradict the efforts of theFed. The benefits of the monetary system are that it can be enactedimmediately with quick results. There are no delays from congress.Second, the Fed uses partisan politics, and so has no ties to anypolitical party, but acts in the best interests of the U.S. Economy.The second way to influence the money supply lies in the handsof the government with the Fiscal Policy. The fiscal policy consistsof two main tools. The changing of tax rates, and changing governmentspending. The main point of fiscal policy is to keep thesurplus/deficit swings in the economy to a minimum by reducinginflation and recession.A change in tax rates is usually implemented when inflation isunusually high, and there is a recession with high unemployment. Withhigh inflation, taxes are increased so people have less to spend, thusreducing demand and inflation. During a recession with highunemployment, taxes are lowered to give more people money to spend andthus increasing demand for goods and services, and the economy beginsto revive.A change in government spending has a stronger effect on theeconomy than a change in tax rates. When the government decides tofight a recession it can spend a large amount of money on goods andservices, all of which is released into the e...
