I would define macroeconomics similarly to how I defined it in What is Economics?.

Macroeconomics examines the economy as a whole and answers questions such as 'What causes
the economy to grow over time?', 'What causes short-run fluctuations in the economy?' 'What
influences the values variouseconomic indicators and how do those indicators affect economic
performance?
Macroeconomics can be best understood in contrast to microeconomics which considers the decisions
made at an individual or firm level. Macroeconomics considers the larger picture, or how all of
these decisions sum together. An understanding of microeconomics is crucial to understand
macroeconomics. To understand why a change in interest rates leads to changes in real GDP, we
need to understand how lower interest rates influence decisions, such as the decision of how much
to save, at the firm or household level. Once we understand how an individual, on average, will
change their behavior we will then understand the large scale relationships in an economy.
Like most definitions in economics, there are various competing definitions of the term
Macroeconomics. Browsing the web, we will find various answers to the question:
What is Macroeconomics? - How Others Define Macroeconomics
Perhaps the simplest answer to the question "What is Macroeconomics?" can be found
atWordReference.com. They state that "Macroeconomics is the branch of economics concerned with
aggregates, such as national income, consumption, and investment ".
The Economist's Dictionary of Economics defines Macroeconomics as "The study of whole economic
systems aggregating over the functioning of individual economic units. It is primarily concerned
with variables which follow systematic and predictable paths of behaviour and can be analysed
independently of the decisions of the many agents who determine their level. More specifically, it
is a study of national economies and the determination of national income."
Macroeconomics as the Economics in the Newspaper
The website Tutor2U answers the question "What is Macroeconomics" with the following response:
"Macroeconomics considers the performance of the economy as a whole. Many macroeconomic
issues appear in the press and on the evening news on a daily basis. When we study
macroeconomics we are looking at topics such as economic growth; inflation; changes in
employment and unemployment, our trade performance with other countries (i.e. the balance of
payments) the relative success or failure of government economic policies and the decisions made
by the Bank of England."
More on Macroeconomics
Economics at About.com has a number of useful resources on Macroeconomics:
The Macroeconomics Student Resource Center has a great deal of articles about Macroeconomic topics,
such as the Business Cycle and Exchange Rates.
The page Macroeconomic Student Resources contains links to a number of high quality sites with
Macroeconomics information. There's also another page of resources available at

: An economic indicator is simply any economic statistic, such as the unemployment rate, GDP, or
the inflation rate, which indicate how well the economy is doing and how well the economy is going
to do in the future. As shown in the article "How Markets Use Information To Set Prices" investors use all
the information at their disposal to make decisions. If a set of economic indicators suggest that the
economy is going to do better or worse in the future than they had previously expected, they may
decide to change their investing strategy.
To understand economic indicators, we must understand the ways in which economic indicators
differ. There are three major attributes each economic indicator has:
Three Attributes of Economic Indicators

1.

Relation to the Business Cycle / Economy

Economic Indicators can have one of three different relationships to the economy:

1.

2.

Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the
economy. So if the economy is doing well, this number is usually increasing, whereas if we're in a recession this
indicator is decreasing. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator.
Countercyclic: A countercyclic (or countercyclical) economic indicator is one that moves in the opposite
direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a countercyclic
economic indicator.

3.

Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally
of little use. The number of home runs the Montreal Expos hit in a year generally has no relationship to the
health of the economy, so we could say it is an acyclic economic indicator.

2.

Frequency of the Data

In most countries GDP figures are released quarterly (every three months) while the unemployment rate is released
monthly. Some economic indicators, such as the Dow Jones Index, are available immediately and change every
minute.

3.

Timing

Economic Indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how
the economy as a whole changes.

Three Timing Types of Economic Indicators

1.

Leading: Leading economic indicators are indicators which change before the economy changes. Stock market
returns are a leading indicator, as the stock market usually begins to decline before the economy declines and
they improve before the economy begins to pull out of a recession. Leading economic indicators are the most

2.

important type for investors as they help predict what the economy will be like in the future.
Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the
economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2
or 3 quarters after the economy starts to improve.

3.

Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The
Gross Domestic Product is a coincident indicator.
In the next section we will look at some economic indicators distributed by the U.S. Government.

What is deflation?
The Glossary of Economics Terms defines deflationas occurring "when prices are declining over
time. This is the opposite of inflation; when the inflation rate (by some measure) is negative, the
economy is in a deflationary period."
The article Why Does Money Have Value? explains that inflation occurs when money becomes relatively
less valuable than goods. Then deflation is simply the opposite, that over time money is becoming
relatively more valuable than the other goods in the economy. Following the logic of that article,
deflation can occur because of a combination of four factors:
1. The supply of money goes down.
2. The supply of other goods goes up.
3. Demand for money goes up.
4. Demand for other goods goes down.
Deflation generally occurs when the supply of goods rises faster than the supply of money, which
is consistent with these four factors. These factors explain why the price of some goods increase
over time while others decline. Personal computers have sharply dropped in price over the last
fifteen years. This is because technological improvements have allowed the supply of computers to
increase at a much faster rate than demand or the supply of money. During the 1980's there was
a sharp increase in the price of 1950's baseball cards, due to a huge increase in demand and a
basically fixed amount of supply of both cards and money. So your suggestion to increase the
money supply if we're worried about deflation is a good one, as it follows the four factors above.
Before we decide that the Fed should increase the money supply, we have to determine how much
of a problem deflation really is and how the Fed can influence the money supply. First we'll look at
the problems caused by deflation.

I'm having a little trouble trying to understand expansionary monetary policies and contractionary
monetary policies. Can you help explain what impact expansionary monetary policies and
contractionary monetary policies have on the economy?
[A:] Thanks for your great question. Students first learning economics often have trouble
understanding what contractionary monetary policy and expansionary monetary policy are and
why they have the effects they do.
Generally speaking contractionary monetary policies and expansionary monetary policies involve
changing the level of the money supply in a country. Expansionary monetary policy is simply a policy
which expands (increases) the supply of money, whereas contractionary monetary policy contracts
(decreases) the supply of a country's currency.
Expansionary Monetary Policy
In the United States, when the Federal Open Market Committee wishes to increase the money
supply, it can do a combination of three things:
1. Purchase securities on the open market, known asOpen Market Operations
2. Lower the Federal Discount Rate
3. Lower Reserve Requirements
These all directly impact the interest rate. When the Fed buys securities on the open market, it
causes the price of those securities to rise. In my article on the Dividend Tax Cut we saw that bond
prices and interest rates are inversely related. The Federal Discount Rate is an interest rate, so
lowering it is essentially lowering interest rates. If the Fed instead decides to lower reserve
requirements, this will cause banks to have an increase in the amount of money they can invest.
This causes the price of investments such as bonds to rise, so interest rates must fall. No matter
what tool the Fed uses to expand the money supply interest rates will decline and bond prices will
rise.
Increases in American bond prices will have an effect on the exchange market. Rising American
bond prices will cause investors to sell those bonds in exchange for other bonds, such as Canadian
ones. So an investor will sell his American bond, exchange his American dollars for Canadian
dollars, and buy a Canadian bond. This causes the supply of American dollars on foreign exchange
markets to increase and the supply of Canadian dollars on foreign exchange markets to decrease.
As shown in my Beginner's Guide to Exchange Rates this causes the U.S. Dollar to become less valuable
relative to the Canadian Dollar. The lower exchange rate makes American produced goods cheaper
in Canada and Canadian produced goods more expensive in America, so exports will increase and
imports will decrease causing the balance of trade to increase.
When interest rates are lower, the cost of financing capital projects is less. So all else being equal,
lower interest rates lead to higher rates of investment.
What We've Learned About Expansionary Monetary Policy:

1.

Expansionary monetary policy causes an increase in bond prices and a reduction in interest rates.

2.

Lower interest rates lead to higher levels of capital investment.

3.

The lower interest rates make domestic bonds less attractive, so the demand for domestic bonds falls and the demand

4.

for foreign bonds rises.

The demand for domestic currency falls and the demand for foreign currency rises, causing a decrease in the exchange

rate. (The value of the domestic currency is now lower relative to foreign currencies)
5. A lower exchange rate causes exports to increase, imports to decrease and the balance of trade to increase.
Be Sure to Continue to Page 2

Definition: Fiscal policy is how the government manages its budget. It collects revenue via
taxation that it then spends on various programs. Elected officials guide fiscal policy, redirecting
funds from one sector of the population to another. The purpose of fiscal policy is to create healthy
economic growth and increase the public good for the long-term benefit of all. As you can imagine,
legislators and their constituents have different ideas of the best way to do that. As a result, fiscal
policy is usually hotly debated, whether at the federal, state, county or municipal level.

Tools of Fiscal Policy

The first tool is taxation, whether of income, capital gains from investments, property, sales or just about
anything else. Taxes provide the major revenue source that funds government. The downside of
taxes is that whatever or whoever is taxed has less income to spend themselves. That makes
taxes very unpopular. Find out exactly how the U.S. Federal budget is funded in Federal Income and
Taxes.
The second tool is spending. The government provides subsidies, transfer payments, contracts to
perform all kinds of public works, and of course salaries to government employees -- to name just
a few. The reason government spending is a tool is that whatever or whoever receives the funds has
more money to spend, thus driving demand and economic growth.
However, the Federal government's ability to use discretionary fiscal policy to respond to economic crises is becoming more
limited each year, thanks to increasing levels of mandated government spending for Medicare, Medicaid and Social Security.
In addition, changing discretionary fiscal policy usually requires an Act of Congress, and this can take a long time. One
exception was the ARRA, or Economic Stimulus Act, which Congress passed quickly. However, legislators knew they
needed to respond quickly to the worst recession since theGreat Depression.

Expansionary Fiscal Policy

A government uses expansionary fiscal policy to stimulate the economy and create more growth.
This is most critical at the contraction phase of the business cycle, when voters are clamoring for
relief from a recession.
How does expansionary fiscal policy work? The government spends more, or cuts taxes, or both if it can. The idea is to put
more money into consumers' hands, so they spend more. This jumpstarts demand, which keeps businesses running, and
hopefully adds jobs. Of course, there is a debate as to which works better. Advocates ofsupply-side economics prefer tax
cuts, which they say frees up businesses to hire more workers to pursue business ventures. For more, see Do Tax Cuts Create
Jobs?, Trickle Down Economics - Does It Work?, and Laffer Curve.
Advocates of demand-side economics say additional spending, such as public works projects, unemployment benefits, and
food stamps, goes directly into the pockets of consumers, who go right out and buy the things businesses produce. For more,
see Unemployment Solutions, How Extended Unemployment Benefits Boost the Economy, and 14 Ways to Create Jobs.

However, expansionary fiscal policy is usually impossible for state and local government because they often are mandated to
keep a balanced budget. If they haven't created a surplus during the boom times, they usually have to cut spending to match
lower tax revenue during a recession -- making it worse.

Fortunately, the Federal government has no such constraints, so it can use expansionary policy when needed. Unfortunately,
this also means Congress has run up budget deficits even during boom times, despite a national debt ceiling. As a result, the
critical debt-to-GDP ratio is now around 100%.

Contractionary Fiscal Policy

As you by now have surely guessed, the purpose of contractionary fiscal policy is to slow down
economic growth. Why would you ever want to do that? One reason only, and that's to stamp
out inflation. That's because the long-term impact of inflation can damage the standard of living as
much as a recession.
The tools of contractionary fiscal policy are used in reverse: taxes are increased, and spending is cut. You can imagine how
wildly unpopular this is among voters. Therefore, it's hardly ever used. Fortunately, monetary policy is very effective in
preventing inflation.

Fiscal Policy vs Monetary Policy

Monetary policy is when a nation's central bank increases the money supply, usingexpansionary monetary
policy, or decreases it, using contractionary monetary policy. It has many tools it can use, but it primarily
relies on raising or lowering the Fed funds rate. This benchmark rates then guides all interest rates.
When interest rates are high, the money supply contracts, the economy cools down, and inflation
is prevented. When interest rates are low, the money supply expands, the economy heats up, and
a recession is avoided -- usually.
Monetary policy works faster than fiscal policy. The Fed can simply vote to raise or lower rates at its
regularly FOMC meeting. It may take about six months for the effect to percolate throughout the economy.

Current Budget Spending

U.S. fiscal policy priorities are outlined in each year's Federal budget. By far, the largest portion of budget spending
is mandatory, which means that existing laws dictate how much will be spent. Most of this is for Social Security, Medicare
and Medicaid entitlement programs. The remaining portion of spending is discretionary, and over half of this portion goes
towardsdefense. Find out more in U.S. Budget and Spending Primer.
Last but certainly not least, find out the latest President's budget proposal in U.S. Federal Budget - Overview and Impact on
the U.S. Economy Article updated July 10, 2012
Examples:

What is monetary policy?

The term "monetary policy" refers to what the Federal Reserve, the nation's central bank, does to
influence the amount of money and credit in the U.S. economy. What happens to money and credit
affects interest rates (the cost of credit) and the performance of the U.S. economy.

What is inflation and how does it affect the economy?

Inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the
value or purchasing power of money. If the supply of money and credit increases too rapidly over
time, the result could be inflation.

What are the goals of monetary policy?

The goals of monetary policy are to promote maximum employment, stable prices and moderate longterm interest rates. By implementing effective monetary policy, the Fed can maintain stable prices,
thereby supporting conditions for long-term economic growth and maximum employment.

What are the tools of monetary policy?

The Federal Reserves three instruments of monetary policy are open market operations, the discount
rate and reserve requirements.
Open market operations involve the buying and selling of government securities. The term open
market means that the Fed doesnt decide on its own which securities dealers it will do business with
on a particular day. Rather, the choice emerges from an open market in which the various securities
dealers that the Fed does business with the primary dealers compete on the basis of price. Open
market operations are flexible, and thus, the most frequently used tool of monetary policy.
The discount rate is the interest rate charged by Federal Reserve Banks to depository institutions on
short-term loans.
Reserve requirements are the portions of deposits that banks must maintain either in their vaults or on
deposit at a Federal Reserve Bank

Economic policy-makers are said to have two kinds of tools to influence a

country's economy: fiscal and monetary.
Fiscal policy relates to government spending and revenue collection. For
example, when demand is low in the economy, the government can step in and
increase its spending to stimulate demand. Or it can lower taxes to increase
disposable income for people as well as corporations.
Monetary policy relates to the supply of money, which is controlled via factors
such asinterest rates and reserve requirements (CRR) for banks. For example, to
control high inflation, policy-makers (usually an independent central bank) can
raise interest rates thereby reducing money supply.
These methods are applicable in a market economy, but not in a
fascist, communist or socialist economy. John Maynard Keynes was a key
proponent of government action or intervention using these policy tools to
stimulate an economy in recession.

Comparison chart</> Embed this chart

Fiscal Policy
Fiscal policy is the use of
government expenditure and
Definition revenue collection to influence the
economy.

Manipulating the level of aggregate

demand in the economy to achieve
Principle economic objectives of price
stability, full employment, and
economic growth.

Policy-maker

Policy Tools

Monetary Policy
Monetary policy is the process by which the
monetary authority of a country controls the
supply of money, often targeting a rate of interest
to attain a set of objectives oriented towards the
growth and stability of the economy.
Manipulating the supply of money to influence
outcomes like economic growth, inflation,
exchange rates with other currencies and
unemployment.

Government (e.g. U.S. Congress,

Treasury Secretary)

Central Bank (e.g. U.S. Federal Reserve or

European Central Bank)

Taxes; amount of government

Interest rates; reserve requirements; currency

Fiscal Policy

Monetary Policy

spending

peg; discount window; quantitative easing; open

market operations; signalling

Contents

o
o

1 Policy Tools
1.1 Fiscal policy
1.2 Monetary policy

2 Videos comparing fiscal and monetary policy

3 Criticism
4 References

The supply-demand model

Policy Tools
Both fiscal and monetary policy can be either expansionaryor contractionary.
Policy measures taken to increase GDP and economic growth are called
expansionary. Measures taken to rein in an "overheated" economy (usually when
inflation is too high) are called contractionary measures.

Fiscal policy
The legislative and executive branches of government control fiscal policy. In the
United States, this is the President's administration (mainly the Treasury
Secretary) and the Congress that passes laws.
Policy-makers use fiscal tools to manipulate demand in the economy. For
example:

Taxes: If demand is low, the government can decrease taxes. This increases disposable
income, thereby stimulating demand.

Spending: If inflation is high, the government can reduce its spending thereby
removing itself from competing for resources in the market (both goods and services).
This is a contractionary policy that would lower prices. Conversely, when there is a
recession and aggregate demand is flagging, increased government spending in
infrastructure projects would lead to higher demand and employment.

Both tools affect the fiscal position of the government i.e. the budget deficit goes
up whether the government increases spending or lowers taxes. This deficit is
financed by debt; the government borrows money to cover the shortfall in its
budget.
Procyclical and Countercyclical Fiscal Policy

In an article for VOX on the tax cuts vs. stimulus debate, Jeffrey
Frankel, Economicsprofessor at Harvard University has said that sensible fiscal
policy is countercyclical.
When an economy is in a boom, the government should run a surplus; other times, when in
recession, it should run a deficit.
[There is] no reason to follow a pro-cyclical fiscal policy. A procyclical fiscal policy piles on
the spending and tax cuts on top of booms, but reduces spending and raises taxes in
response to downturns. Budgetary profligacy during expansion; austerity in recessions.
Procyclical fiscal policy is destabilising, because it worsens the dangers of overheating,
inflation, and asset bubbles during the booms and exacerbates the losses in output and
employment during the recessions. In other words, a procyclical fiscal policy magnifies the
severity of the business cycle.

Monetary policy
Monetary policy is controlled by the Central Bank. In the U.S., this is the Federal
Reserve. The Fed chairman is appointed by the government and there is an
oversight committee in Congress for the Fed. But the organization is largely
independent and is free to take any measures to meet its dual mandate: stable
prices and low unemployment.
Examples of monetary policy tools include:

Interest Rates: Interest rate is the cost of borrowing or, essentially, the price of
money. By manipulating interest rates, the central bank can make it easier or harder to
borrow money. When money is cheap, there is more borrowing and more economic
activity. For example, businesses find that projects that are not viable if they have to

borrow money at 5% are viable when the rate is only 2%. Lower rates also disincentivize
saving and induce people to spend their money rather than save it because they get so
little return on their savings.

Reserve requirement: Banks are required to hold a certain percentage (cash reserve
ratio, or CRR) of their deposits in reserve in order to ensure that they always have
enough cash to meet withdrawal requests of their depositors. Not all depositors are
likely to withdraw their money simultaneously. So the CRR is usually around 10%,
which means banks are free to lend the remaining 90%. By changing the CRR
requirement for banks, the Fed can control the amount of lending in the economy, and
therefore the money supply.

Currency peg: Weak economies can decide to peg their currency against a stronger
currency. This tool is usually used in cases of runaway inflation when other means to
control it are not working.

Open market operations: The Fed can create money out of thin air and inject it into
the economy by buying government bonds (e.g. treasuries). This raises the level of
government debt, increases the money supply and devalues the currency causing
inflation. However, the resulting inflation supports asset prices such as real estate and
stocks.

Videos comparing fiscal and monetary policy

This video explains the different monetary and fiscal policy tools.
The following video is a little more technical. It explains the effects of fiscal and
monetary policy measures using the IS/LM model.

Criticism

Libertarian economists believe that government action leads to inefficient

outcomes for the economy because the government ends up picking winners and
losers, whether intentionally or through unintended consequences. For example,
after the 9/11 attacks the Federal Reserve cut interest rates and kept them
artificially low for too long. This led to the housing bubble and the subsequent
financial crisis in 2008.
Economists and politicians rarely agr

Economic policy-makers are said to have two kinds of tools to influence a

country's economy: fiscal and monetary.
Fiscal policy relates to government spending and revenue collection. For
example, when demand is low in the economy, the government can step in and
increase its spending to stimulate demand. Or it can lower taxes to increase
disposable income for people as well as corporations.
Monetary policy relates to the supply of money, which is controlled via factors
such asinterest rates and reserve requirements (CRR) for banks. For example, to
control high inflation, policy-makers (usually an independent central bank) can
raise interest rates thereby reducing money supply.
These methods are applicable in a market economy, but not in a
fascist, communist or socialist economy. John Maynard Keynes was a key
proponent of government action or intervention using these policy tools to
stimulate an economy in recession.

Comparison chart</> Embed this chart

Fiscal Policy
Fiscal policy is the use of
government expenditure and
Definition revenue collection to influence the
economy.

Manipulating the level of aggregate

demand in the economy to achieve
Principle economic objectives of price
stability, full employment, and
economic growth.

Policy-maker

Policy Tools

Monetary Policy
Monetary policy is the process by which the
monetary authority of a country controls the
supply of money, often targeting a rate of interest
to attain a set of objectives oriented towards the
growth and stability of the economy.
Manipulating the supply of money to influence
outcomes like economic growth, inflation,
exchange rates with other currencies and
unemployment.

Government (e.g. U.S. Congress,

Treasury Secretary)

Central Bank (e.g. U.S. Federal Reserve or

European Central Bank)

Taxes; amount of government

Interest rates; reserve requirements; currency

Fiscal Policy

Monetary Policy

spending

peg; discount window; quantitative easing; open

market operations; signalling

Contents

o
o

1 Policy Tools
1.1 Fiscal policy
1.2 Monetary policy

2 Videos comparing fiscal and monetary policy

3 Criticism
4 References

The supply-demand model

Policy Tools
Both fiscal and monetary policy can be either expansionaryor contractionary.
Policy measures taken to increase GDP and economic growth are called
expansionary. Measures taken to rein in an "overheated" economy (usually when
inflation is too high) are called contractionary measures.

Fiscal policy
The legislative and executive branches of government control fiscal policy. In the
United States, this is the President's administration (mainly the Treasury
Secretary) and the Congress that passes laws.
Policy-makers use fiscal tools to manipulate demand in the economy. For
example:

Taxes: If demand is low, the government can decrease taxes. This increases disposable
income, thereby stimulating demand.

Spending: If inflation is high, the government can reduce its spending thereby
removing itself from competing for resources in the market (both goods and services).
This is a contractionary policy that would lower prices. Conversely, when there is a
recession and aggregate demand is flagging, increased government spending in
infrastructure projects would lead to higher demand and employment.

Both tools affect the fiscal position of the government i.e. the budget deficit goes
up whether the government increases spending or lowers taxes. This deficit is
financed by debt; the government borrows money to cover the shortfall in its
budget.
Procyclical and Countercyclical Fiscal Policy

In an article for VOX on the tax cuts vs. stimulus debate, Jeffrey
Frankel, Economicsprofessor at Harvard University has said that sensible fiscal
policy is countercyclical.
When an economy is in a boom, the government should run a surplus; other times, when in
recession, it should run a deficit.
[There is] no reason to follow a pro-cyclical fiscal policy. A procyclical fiscal policy piles on
the spending and tax cuts on top of booms, but reduces spending and raises taxes in
response to downturns. Budgetary profligacy during expansion; austerity in recessions.
Procyclical fiscal policy is destabilising, because it worsens the dangers of overheating,
inflation, and asset bubbles during the booms and exacerbates the losses in output and
employment during the recessions. In other words, a procyclical fiscal policy magnifies the
severity of the business cycle.

Monetary policy
Monetary policy is controlled by the Central Bank. In the U.S., this is the Federal
Reserve. The Fed chairman is appointed by the government and there is an
oversight committee in Congress for the Fed. But the organization is largely
independent and is free to take any measures to meet its dual mandate: stable
prices and low unemployment.
Examples of monetary policy tools include:

Interest Rates: Interest rate is the cost of borrowing or, essentially, the price of
money. By manipulating interest rates, the central bank can make it easier or harder to
borrow money. When money is cheap, there is more borrowing and more economic
activity. For example, businesses find that projects that are not viable if they have to

borrow money at 5% are viable when the rate is only 2%. Lower rates also disincentivize
saving and induce people to spend their money rather than save it because they get so
little return on their savings.

Reserve requirement: Banks are required to hold a certain percentage (cash reserve
ratio, or CRR) of their deposits in reserve in order to ensure that they always have
enough cash to meet withdrawal requests of their depositors. Not all depositors are
likely to withdraw their money simultaneously. So the CRR is usually around 10%,
which means banks are free to lend the remaining 90%. By changing the CRR
requirement for banks, the Fed can control the amount of lending in the economy, and
therefore the money supply.

Currency peg: Weak economies can decide to peg their currency against a stronger
currency. This tool is usually used in cases of runaway inflation when other means to
control it are not working.

Open market operations: The Fed can create money out of thin air and inject it into
the economy by buying government bonds (e.g. treasuries). This raises the level of
government debt, increases the money supply and devalues the currency causing
inflation. However, the resulting inflation supports asset prices such as real estate and
stocks.

Videos comparing fiscal and monetary policy

This video explains the different monetary and fiscal policy tools.
The following video is a little more technical. It explains the effects of fiscal and
monetary policy measures using the IS/LM model.

Criticism

Libertarian economists believe that government action leads to inefficient

outcomes for the economy because the government ends up picking winners and
losers, whether intentionally or through unintended consequences. For example,
after the 9/11 attacks the Federal Reserve cut interest rates and kept them
artificially low for too long. This led to the housing bubble and the subsequent
financial crisis in 2008.
Economists and politicians rarely agr