Economics For Dummies, 4th Edition

Chapter 17

Fighting Recessions with Monetary and Fiscal Policy

IN THIS CHAPTER

Using monetary and fiscal policy to stimulate the economy

Facing the fact that too much stimulus causes inflation

Realizing that rational expectations can frustrate monetary and fiscal policy

Getting the details behind monetary and fiscal policy

Monetary and fiscal policy are two of the most important functions of modern governments. Monetary policy focuses on increasing or decreasing the money supply to influence the economy, and fiscal policy uses government spending and the tax code to influence the economy.

Thanks to the development of good economic theory, governments can use monetary and fiscal policy to mitigate the duration and severity of recessions. This theory is hugely important because it gives governments the chance to make a positive difference in the lives of billions of people. Good economic policy can make a nation prosperous, but bad economic policy can ruin it.

That being said, monetary and fiscal policy aren’t without problems. In this chapter, I show you how well they can work in ...