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- Well, actually Darla, there is a much larger process that goes into fixing our prices. There are two different ways our country can handle high prices; monetary and fiscal policy.
- Mrs. Smith, I have a question? Why is everyone so worried about how much stuff costs? Can't everyonejust print more money?
- Monetary Policy is the action of the Federal Reserve to prevent or address extreme economic fluctuations. The main tool that the Federal Reserve uses are bonds. Depending on the current economic situation, the Fed either buys or sells bonds.Fiscal policy is the action of the government to prevent or address extreme economic fluctuations. Depending on the economy’s current situation, the government either increases or decreases government spending and taxes. Although these two policies have the same ultimate goal of trying to stabilize the economy, fiscal and monetary policy do tend to contradict each other. For example, right now, the Fed is increasing interest rates as a part of contractionary monetary policy, while the government is increasing spending as a part of expansionary fiscal policy.
- Monetary and fiscal policy? What are those?
- It sure is,but continuedgovernment spending is going to do no good for the country right now. The current inflation rate is around 7%, which isalarminglyhigh. In order to fix this, the government needs to implement contractionary fiscal policy. This would include reducing government spending or increasing the tax rate.
- Man, isn't this new highway the government built beautiful?
- Well, not exactly. Decreasing government spending will drastically help bring down the inflation rate, but the governmentalso needs to increase taxes if they want to bring theeconomy back to normal.The new tax code that was implemented by former president Donald Trump gave citizens a tax break, which, initially, was a great booster for the economy. In the beginning, the tax break was doing great things for the economy, but now, it is one of the greatest contributors to the skyrocketing inflation rate.
- That makes sense. So, if the government quits building new roads, the inflation rate will go back to normal?
- Everything is so expensive in this city. I sure do miss the great state of Texas. How is the economy there right now?
- Currently, the Texas economy, and the rest of the United States, is fighting an unbelievably high inflation rate. When covid-19 hit the country, it caused many disruptions throughout the economy. Supply-chain issues and labor shortages were seen not only in Texas, but across the entire nation. The virus was detrimental to supply-chains, which resulted in the prices of many goods going up. Also, since Texas and the entire country is fighting a huge labor shortage, wages have skyrocketed in an attempt to get people to go back to work.
- Has the Fed taken any actions regarding the federal funds rate to fix this?
- Well, at the end of last year, the Fed kept their policy rate around zero percent to allow the economy to continue growing. Since then, the inflation rate has greatly increased. Therefore, the Fed is expecting that they will need to raise the target range for the federal funds rate in the nearfuture. Thiswould greatly help the Texas economy because it would help bring down the skyrocketing inflation rate.
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