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Word Count: 448
The management of the money supply and interest rates is what is known as monetary policy The Federal Reserve System the Fed was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington DC and twelve Federal Reserve District Banks The Congress structured the Fed to be independent within the government-that is although the Fed is accountable to the Congress it is insulated from day-to-day political pressures this reflects the conviction that the people who control the countrys money supply should be independent of the people who frame the governments spending decisions Monetary policy has two basic goals to promote maximum output and employment and to promote stable prices The point of implementing policy through raising or lowering interest rates is to affect peoples and firms demand for goods and services the Feds can stimulate the economy out of a recession but cant stimulate the economy all the time because the Persistent attempts to expand the economy beyond its long-run growth path will press capacity constraints and lead to higher and higher inflation without producing lower unemployment or higher output in the long run In other words not only are there no long-term gains from persistently pursuing expansionary policies but theres also a price-higher inflation High inflation can hinder economic growth for example when the inflation is high it intends to vary a lot which makes people uncertain about what inflation will be in the future Thats why the Federal Reserve is important so they can arrange and make sure that economy is on the right track and growing at the right rate without creating any depression As for the fiscal policy its that part of government policy which is concerned with raising revenue through taxation and with deciding on the amounts and purposes of government spending A fiscal policy is more likely when inflation is high a contractionary fiscal
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