Fiscal and Monetary Policy and

Fiscal and Monetary Policy and Economic Fluctuations The United States government and the Federal System use two powerful techniques to guide the nation's economy in the right direction. These tools are fiscal and monetary policy, which has the same results in stimulating the economy and slowing it down when used appropriately. Fiscal policy mainly refers to when the government utilizes its powers in spending and taxing in order to have a significant effect on the economy.

Fiscal policy has considerable effects on personal spending, interest rates, exchange rates, and levels of deficit. Monetary policy refers to strategies used by the Federal Reserve to stimulate or slow the economy in order to develop an easy money environment. Based on their effects, fiscal policy and monetary policy play a crucial role in determining the economic situation of a country.

Current Economic Situation in the U.S.: Recent surveys have indicated that the confidence of Americans in the nation's economy have remained steady for the better part of 2014 though they are still within the negative territory. The steady confidence in the economy has been fueled by the economic improvements that have been achieved since the government shutdown in mid-October 2013. Some of these major improvements include increase in GDP growth, decrease in the unemployment rate, better stock market, and low interest rates that enhanced demand for housing.

As compared to the last quarter of 2013, the rate of unemployment rate in the first quarter of this year has declined to an average of 6.7. This represents a significant decline in unemployment as compared to five years ago when the country had high rates of unemployment. According to a report by The Federal Open Market Committee, inflation in the United States has continued to run below the 2% objective (Yellen, 2014).

Actually, the country's inflation recently fell to 0.9% from 1.2% in January, which is below the preferred inflation gauge of 2% by the Federal Reserve. By the end of March 2014, the rate of inflation in the United States was 1.51%, which represented a 0.38% increase from the past month. Similar to five years ago, interest rates in the United States have remained relatively low, which have contributed to plans by the Federal Reserve to raise these rates by spring 2015.

The Fed seeks to raise interest rates through consideration of unemployment rate and a broad range of economic information including initiatives of labor market conditions. The low interest rates in the country can be attributed to the use of the sluggishly declining rate of unemployment as the basis of raising interest rates. Reasons for Changes in Interest Rates, Unemployment Rates, and Inflation: The current economic situation in the United States with regards to unemployment rate, inflation, and interest rates is fueled by various factors or reasons.

Since the beginning of the year, the rate of unemployment has slightly declined because of relatively weaker spending and production. While labor market conditions have improved, unemployment rate have remained the same because of weaker spending and production. Inflation remains low because of the seemingly unchanging rate of unemployment and income. In addition, the low inflation rate is associated with the slow economic activity during the winter months because of adverse weather conditions (Liu, 2014). One of the major reasons for the minimal changes in U.S.

interest rates as compared to five years ago is the slow recovery in the housing sector. The housing sector continues to slowly recover from the effects of the 2008 global recession. This rate of recovery has had significant effects on the country economy as evident in the low interest rates. Strategies to Encourage Consumer Spending: The Federal Reserve can use fiscal and monetary policy to develop strategies that will encourage people to spend money in order to stimulate economic growth.

One of these strategies, which is a fiscal policy initiative, is government tax cuts that enhances the buying power of consumers. Tax cuts encourage consumer spending by allowing families to keeping a huge portion of their income, which in turn creates opportunities to spend money on products and services. As individuals and families spend money on products and services, they help generate revenue that is beneficial to the country's economy. The second strategy is controlling the quantity and management of cash supply through the Federal Reserve.

This is a monetary policy initiative that helps in managing interest rates and encourages consumers to buy products and services that they would not normally buy with higher interest rates. Controlling the quantity and management of cash supply contributes to lower interest rates, which lessens the cost of borrowing while encouraging consumer spending and investment (Pettinger, 2012). The main impact of these strategies in enhancing economic growth is that they will help in lessening negative effects of economic activities on inflation rate,.