The government attempts to manage the economy's ups and downs through two types of economics policy "fiscal policy and monetary policy. To encourage steady economic growth, making use of two policies is important. .
Monetary policy is managing the economy by controlling the money supply and interest rates. Monetary policy is not made by either Congress or the President but by the Federal Reserve System(Fed), most specifically its Federal Operating Market Committee(FOMC). The Board of Governors have 14-year terms tenure, and are appointed by the president with the consent of Senate. The chairman is appointed to a four-year term. The core of monetarism is the idea that prices, income, and economic stability are primarily a function of growth in the money supply. Fed tries to stabilize economy by controlling the quantity of money that is made available in the economy, so-called money supply. Fed has several tools to regulate the money supply, purchase and sale of government bonds, open-market sale of bonds, and so forth. .
Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes. Unlike monetary policy that changes the money supply and influences the spending decisions, government alters its own purchases of goods and services in the fiscal policy; thus, fiscal policy shifts the aggregate-demand curve directly. Fiscal policy, however, works with a lag because of the long political process that governs changes in spending and taxes, pass both the House and the Senate, and be signed by the president. .
The goal of both fiscal policy and monetary policy is to smooth out the booms and busts of the business cycle so that unemployment and inflation are kept at a minimum and to allow real income to rise. Since the fiscal policy and monetary policy differs each other, the economic policy should be well chosen in order to save the economy.
