Question

In terms of Macroeconomics, compare and contrast fiscal and monetary policies in terms of their main strengths and weeknesses.

Answer 1

FISCAL POLICIES-

fiscal policy is concerned with the spending of government,therefore this is a tool of government which is responsible for maintenance of stability in the economy.

IMPORTANCE OF FISCAL POLICY-

• HELPFUL AND EFFECTIVE IN DEPRESSION-fiscal policy is very important to pull the economy from depression and from preventing the economy from vicious circle.
• REPRESENTS THE GOVERNMENT ROLE IN THE MARKET-fiscal policy represents the important role of government at the time of economic crisis.
• DEVELOPMENT OF INFRASTRUCTURE-due to government spending and construction and development works the overall economy take place.

WEAKNESS-

• VIOLATION OF FREE MARKET PRINCIPLE-government decisions on business violates the free market principles.
• EXCESSIVE INTERFERENCE-when there is excess interference of government of the government like production quota,excessive taxation,it leads to create market inefficiency in the economy.
• DEFICIT OF BUDGET-excessive government spending leads to budget deficit which means the ultimate burden of deficit is borne by the public

MONETARY POLICY-

monetary policy is the most effective and important tool of central bank of the country.it controls the inflation in economy.

IMPORTANCE-

• HELPFUL IN CONTROLLING INFLATION-bank rates,repo rates etc are liable to control the level of inflation in the economy.
• REPRESENT THE ROLE OF CENTRAL BANK-monetary policy represents the important role of central bank in the economy.
• MAINTAINING THE FLOW OF CASH-central bank maintains the demand and supply of cash and try to stabilize the equilibrium level.

WEAKNESS-

• EXPANSIONARY POLICY LEADS TO INFLATION IN THE ECONOMY-if government published new currency in the economy then the inflation rate would be increased and the value of currency would decline.
• NOT EFFECTIVE IN DEPRESSION AND LIQUIDITY TRAP-this policy is not useful in the condition of depression and liquidity trap,because people would be in a panic situation at this level and would prefer to hold cash rather then lend it even at a higher rate of interest.
• COMPLICATED MECHANISM-the working and management is complicated which needs specialize knowledge and skill for technical analysis and implementation of policy.