Introduction to Finance

Figure 5.1
illustrates how the four groups use monetary and fi scal policies, supported by debt 
management practices, to carry out the four economic objectives of economic growth, stable 
prices, high employment, and balance in international transactions.
As discussed in Chapter 4, the Fed establishes monetary policy, including managing the 
supply and cost of money. We will see later in this chapter how the money supply is actually 
changed. 
Fiscal policy
 
involves setting the annual federal budget, and it refl ects government 
infl ation 
occurs when an increase 
in the price of goods or services is 
not off set by an increase in quality
fi scal policy 
government infl uence 
on economic activity through 
taxation and expenditure plans

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C H A PT E R 5 Policy Makers and the Money Supply
infl uence on economic activity through taxation and expenditure plans. Fiscal policy is carried 
out by the president and Congress. The U.S. Treasury supports economic policy objectives 
through its debt management practices.
Ethical Behavior in Government
ETHICAL
Since World War II, 12 individuals served as president of the United States. The decade 
of the 1990s included George H. W. Bush and William (Bill) Clinton. The decade of the 2000s 
was primarily under the direction of George W. Bush and Barack Obama.
One would expect that the leader of the United States should and would exhibit a very 
high level of moral and ethical behavior. We expect the people of our nation to practice sound 
ethical behavior by treating others fairly and honestly. Certainly, the president has the oppor-
tunity to lead by example. Two recent presidents, Richard Nixon (who served as president 
during 1969–1974) and Bill Clinton (who served as president during 1993–2001), were each 
accused of unethical behavior while president. Nixon resigned on August 9, 1974, just before 
he was impeached because of the Watergate scandal involving offi
ce break-ins. In 1998, Clinton 
became the second president to be impeached by the House of Representatives. Clinton’s 
handling of personal indiscretions with a White House intern led to his trial in the Senate. He 
was found not guilty and completed his second term.
3
Unethical behavior in government has not been limited to presidents. There also have 
been numerous accounts of unethical behavior on the part of members of Congress. Some 
individuals have been impeached and others have been sent to prison. With this said, the vast 
majority of members of Congress and past presidents have practiced high ethical behavior, 
including fair and honest treatment of their constituents. The other good news is that the U.S. 
government and society have overcome the isolated unethical behavior of a few leaders. 
Policy Makers in the European Economic Union
GLOBAL
As in the United States, European governments use monetary and fi scal policies to try 
to achieve similar economic goals, such as economic growth and price stability. In December 
1991, the members of the 
European Union (EU)
signed the 
Maastricht Treaty
in Maastricht, 
Netherlands. The objective was to converge their economies, fi x member country exchange 
rates, and introduce the euro as a common currency at the beginning of 1999. Monetary 
and fi scal policy actions of each country were to focus on maintaining price stability, keep-
ing government budget defi cits below 3 percent of gross domestic product (GDP) and total 
government debt below 60 percent of GDP, and maintaining stability in relative currency 
exchange rates. Of the 15 EU countries, 12 members formed the 
European Monetary Union 
(EMU),
ratifi ed the Maastricht Treaty, and qualifi ed to adopt the euro as their common cur-
rency with conversion offi
cially taking place in 2002. Since then, EU membership has grown 
to 28 countries, (although the United Kingdom has recently voted to withdraw from the EU), 
with 19 of these countries joining the EMU and adopting the euro as their common currency. 
It is striking that initially 12 and now 19 countries with widely diff erent past applica-
tions of monetary and fi scal policies could agree on similar economic and fi nancial object-
ives. While each country continues to formulate its own fi scal policies today, the 
European