Question

What are the tradeoffs between monetary policy and fiscal policy in macroeconomic. (300-400 words please written not image)

Answer 1

Both monetary and fiscal policies are tools used by the govt to control the levels of price( inflation) or the general GDP levels in the economy. Monetary policy is made effective with the tools like change in rate of interests or rise in money supply by the banking systems. These changes directly impact the general behaviour of the individuals with respect to investment and savings, hence the economy is corrected .

On the other hand fiscal policies are effective when the economy is corrected by the govt through direct spending increasing the aggregate demand by increasing the employment levels. Along with this fiscal policies determine the changes in capacity through taxation rates , rising or falling, directly impacting the net GDP with the govt.

Keeping in view the different approaches , there is always a trade-off between monetary and fiscal policies. Monetary policies are usually more in use because these are indirect methods and govt prefers them over fiscal policy. In addition fiscal policies require enough reserve capacity with the govt as direct govt spending needs moentary support , which is pumped in by the govt directly , while for monetary policy , the nature of investments and spending are being altered in order to achieve ideal situations for the economy. Finally a fiscal policy is avoided to prevent confrontation on a political front as they are more blunt and effect the consumers more directly .

This must be understood that a policy mix is appropriately for dealing the economic disequilibrium more efficiently. Today's economies are internationally connected and hence various factors are impacting economy. Hence ideal and most efficient tools should be used for various problems, which usually is dealt better with a policy mix.