Question

Limitations: Fiscal policy vs Monetary Policy

Key Question:

1. What are the limitations of Fiscal policy?

2. What are the limitations of Monetary policy?

3. Which policy do you think is the most effective out of the two policies (Fiscal or Monetary policy). Why do you think so?

Answer 1

1 The limitations of fiscal policy are; time taking result, crowding out of private sector, imbalances in the budget, political pressure, adverse effect on debt management etc.

2 The limitations of monetary policy are; effectI've in the long time even in years, less effective during recession, affect the entire country instead of a particular region, a very low interest rate may lead to a liquidity trap etc

3. I think fiscal policy is the most effective one. It is instrumental in countering recession in a better way than monetary policy. A proper fiscal policy save the economy from jerks. It helps in increasing real income and employment in the economy. Fiscal policy directly and indirectly affects aggregate demand. A change in the government spending directly change the level of aggregate demand, because the government spending is a component of the aggregate demand. It also indirectly affects aggregate demand via altering consumption through change in taxes.