Question

In response to Covid-19 lockdown resulting in the Global economic crisis and economic recessionary conditions the State Bank of Pakistan realized the need for expansionary monetary policy On the recommendations of Monetary Committee, the SBP reduced the policy rate from 13.5% to 8% in a period of two months. However, in recent meeting of Fiscal and Monetary Policy Coordination Board the Government made a compelling case for the further lowering of the interest rate. Its basic argument was that high rate of interest rates have increased the cost of domestic debt servicing leaving no fiscal space for it to offer tariff concessions to support export oriented industries. Fiscal authorizes also argue that continuation of a tight monetary policy (high interest rate) is not helping industries to grow fast enough to contribute significantly to the required expansion in the tax revenue. Independent economists and business lobbies hold the view that inflation now is partly cost-push in nature and requires further easing in the monetary policy (lowering rate of interest) to spur economic activity and investment in industrial sector. The State Bank however argues that a further rate cut in the interest will negatively impact the inflow of hot money or foreign investment in government debt papers/ bonds. The SBP further argued that owing to lower inflation numbers foreign investors have already stated withdrawing such investment.

Required:
a-   Explain the common tools of Monetary and Fiscal policies which you will recommend for promoting trade, businesses, investment and exports under the current Covid and Post-Covid economic environment.
b-   Explain in brief the merits and demerits of Expansionary and Contractionary monetary and Fiscal policies. Which policies will you recommend for giving stimulus to revive declining business environment during the current global crisis.

Answer 1

a)

A macroeconomic policy consigned by central government is monetary policy.Main objectives are economic growth, consumption increase ,liquidity and to maintain low inflation rate. it influences and results in increase of supply and demand through kinda of monetary tools and other interests. it promotes economic growth and its one of the main tool is changing inflation rates .The actions taken by government to adjust spending levels and to monitor tax rates to influence the economy of a country is called fiscal policy. Achieve highest employment and to maintain economic growth are the main goals of it.     

In the current situation of ovid pandemic countries all over the world is facing many problems in economic sector. Economic growth of the ovid are declining due to the crisis. Due to the restrictions in export and import of products countries countries, and decline of tourism and industries due to the reduce in manufacturing and lockdown restrictions are all affected the economy of each and every countries well. Unemployment rate was increased highly.

We know that taxes and spending and payment transfer are the tools of fiscal policy and together with it tools of monetary policy are open market operations , discount rate and reserve requirements and also the interest rates. Open market operations help to carried out selling and buying through the supply of money, discount rate in interest help to increase deposits and small term loans.In the times of depression these policies can be effectively implemented. It changes the interest income of the common. It help to limit disposable

b) MERITS AND DEMERITS OF EXPANSIONARY FISCAL POLICY

MERITS:

** It helps in reducing unemployment through government intervention. it increases the purchases and reduces the taxes. private sector increases the scale of disposable their production to meet the growing demand.

** It stimulates the economic growth  of a country through various fiscal measures. when the government decreases the tax the individuals increase their investments in the business. The similar policy is done in the phase of recession in US economy.

** expansionary fiscal policy leads to the reduction in budget deficit. when the government reduces the spending and increases the tax rate it will ultimately make path to more revenue collection. Thus government can reduce the deficit occurred to a large extent.

DEMERITS:

** Delayed implementation of fiscal policies is occurred limitation. This may cause inflexibility and cannot be used as a tool in recession. there will be huge delay in emergency situations.

** the mix up of expansionary and contraction policies may lead to contraction of objectives. thus government conflicts offers more bondar than other bonds.

MERITS AND DEMERITS OF benefits FISCAL POLICY

MERITS:

** it is helpful for reducing the rate of CONTRACTIO NARY and generates more unemployment for the public.

** the banks may reduce the tax rate which ultimately benefits the society.

** it helps to increase the welfare of society.

DEMERITS:

** opportunities fiscal policy causes inflation in the economy.

** this type of fiscal policy increases the prices of investments in an economy.

** contraction fiscal policy is said to be unsustainable. thus it may lead the contraction y to the recession.

** government may cut the spending in economy.

I would recommend the contraction fiscal contraction for revival of business environment . because it helps enterprise to grow further faster than the other.   it howls the economy to attain the potential GDP.  

Answer 2

A) monetary and fiscal expansionary policies are required to increase liquidity in the market and increase demand, production, investment ,promote export etc. By using these policies aggregate demand and supply can be increase as result come out from recession situation.

Merit of these policy are that :

Boost aggregate demand , create employment and increase production, and thus increasing aggregate supply and thus comes out from low gdp growth cycle.

Demerits:

Fiscal deficit increase can create problem in long run as it will create negative reputation about country for investor.it may increase inflation as liquidity increase in market.

Monetary policy of expansionary can create problem bof twin balance sheet as banking system provide loan at low interest rate and thus in case of low return in future ,it may be changed into NPA situation.

Thus both of these conditions may lead to negative credit rating by agency in future and thus effect investment etc.

Fiscal expansionary Policy or fiscal stimulus package will be help full to increase investment in the economy and Create demand in the economy . Thus employment and income increase will again create demand and thus aggregate supply will boost.