Question

Define the following terms , and explain them with some examples to illustrate them : Fiscal policy , Monetary policy ?

Answer 1

Monetary policy it is the policy designed and implemented by central bank of a country who manage , control and adjust to influencing the money supply.

Fiscal policy involves the government policy that includes tax regulation, government spending and borrowing from general public.

They are both used to pursue policies of higher economic growth or controlling inflation.

monetary policy takes into account various instrument to control and manage the inflation and deflation conditions existing in the economy. monetary policy have two types of instruments

1. qualitative instruments includes moral suasion, marginal requirement and credit rationing.

2 quantitative instruments includes bank rate repo rate reverse repo rate LRR and OMO to manage the supply of money the short and long run.

Fiscal policy

Fiscal policy is carried out by the government and involves changing:

• Level of government spending
• Levels of taxation

1. To increase demand and economic growth, the government will cut tax and increase spending to overcome the situation of deflation in the economy
2. To reduce demand and reduce inflation, the government increase tax rates and cut spending to overcome the situation of inflation in the economy.

Example of expansionary fiscal policy

In a recession, the government may decide to increase borrowing and spend more on infrastructure spending. The increase in government spending is like a injection of money into the economy and helps to create jobs.