Monetary and Fiscal Policy – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🧾 Monetary and Fiscal Policy – Series 7 Exam Guide
📘 Understand the Core Economic Policies Tested on the Series 7
The Series 7 exam expects you to understand the differences between monetary and fiscal policy, how each one influences the economy, and how changes can affect securities markets. Below is a clear, focused guide on monetary policy and fiscal policy, specifically for Series 7 exam preparation.
🎯 1. What Is Monetary Policy?
Monetary policy refers to the Federal Reserve’s actions to control the money supply and interest rates in the economy.
Key Goals of Monetary Policy:
- Control inflation
- Promote maximum employment
- Stabilize the financial system
Main Tools of the Federal Reserve:
| Tool | What Happens |
|---|---|
| Open Market Operations | Buying/selling U.S. Treasuries to increase or decrease money supply |
| Discount Rate | Interest rate the Fed charges banks for short-term loans |
| Reserve Requirements | Percentage of deposits banks must hold in reserve |
| Interest on Excess Reserves (IOER) | The Fed pays interest on reserves held by banks |
Types of Monetary Policy:
- Easy (loose) monetary policy:
- Fed buys Treasuries
- Lowers interest rates
- Stimulates borrowing and spending
- Tight (restrictive) monetary policy:
- Fed sells Treasuries
- Raises interest rates
- Slows down borrowing and spending to control inflation
🎯 2. What Is Fiscal Policy?
Fiscal policy refers to Congress’s use of taxing and spending to influence the economy.
Key Goals of Fiscal Policy:
- Manage economic growth
- Stabilize unemployment
- Control inflation or deflation
Main Tools of Fiscal Policy:
| Tool | What Happens |
|---|---|
| Government Spending | Increases demand by injecting money into the economy |
| Taxation | Higher taxes = reduce consumer spending; lower taxes = stimulate spending |
Types of Fiscal Policy:
- Expansionary Fiscal Policy:
- Increase government spending
- Decrease taxes
- Goal: Stimulate growth (used in recessions)
- Contractionary Fiscal Policy:
- Decrease government spending
- Increase taxes
- Goal: Cool down inflation
🎯 3. Key Differences You Must Know for the Series 7
| Aspect | Monetary Policy | Fiscal Policy |
|---|---|---|
| Controlled by | Federal Reserve (The Fed) | U.S. Congress and President |
| Main Tools | Interest rates, reserve requirements, open market operations | Government spending and taxation |
| Speed of Implementation | Faster (Fed can act quickly) | Slower (requires legislation and political negotiation) |
| Main Goal | Manage money supply and control inflation | Influence economic growth and employment |
🎯 4. How Monetary and Fiscal Policies Impact Investments
| Policy | Impact on Investments |
|---|---|
| Easy Monetary Policy | Stimulates stock market growth, lowers bond yields |
| Tight Monetary Policy | Slows stock market growth, raises bond yields |
| Expansionary Fiscal Policy | Boosts corporate earnings and stock prices, may cause inflation |
| Contractionary Fiscal Policy | Reduces corporate earnings and slows down stock market growth |
🚀 5. Series 7 Exam Tip: How to Remember It
💡 Monetary = Money Supply = The Fed
💡 Fiscal = Federal Spending = Congress
If a question mentions the Federal Reserve, interest rates, or open market operations, it’s about monetary policy.
If it mentions tax cuts, government budgets, or public projects, it’s about fiscal policy.
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