1.7 Monetary vs. Fiscal Policy
Macroeconomic policies drive market liquidity and securities valuations. The SIE tests the distinction between monetary tools (Fed) and fiscal measures (Congress).
Key FINRA Exam Takeaways
- Monetary Policy: Managed by the Federal Reserve Board (FRB) to control money supply and interest rates.
- FRB Tools: 1. Open Market Operations (FOMC - most frequently used); 2. Discount Rate (rate Fed charges member banks); 3. Reserve Requirements (most drastic).
- Fiscal Policy: Managed by Congress and the President through government spending and taxation (Keynesian economics).
- Easy / Loose Money: Fed buys Treasuries, lowers interest rates -> stimulates economy. Tight Money: Fed sells Treasuries, raises rates -> fights inflation.
| Attribute | Monetary Policy | Fiscal Policy |
|---|---|---|
| Controlling Entity | Federal Reserve Board (FRB) | US Congress and the President |
| Primary Tools | Open Market Operations, Discount Rate, Reserve Requirement | Government Spending, Federal Taxation |
| Implementation Speed | Rapid (FOMC meetings every 6 weeks) | Slow (Congressional legislative process) |
| Economic Objective | Price stability and maximum sustainable employment | Economic growth, infrastructure, social programs |
Knowledge Checkpoint • Section 1.7
If the Federal Reserve wants to stimulate economic activity and expand the money supply, which action will the Federal Open Market Committee (FOMC) take?