Question

ANSWER CLEARLY AND COMPREHENSIVELY:

Enumerate 2 differences between fiscal policy monetary policy.

Answer 1

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Monetary policy is usually carried out by the Central Bank/Monetary authorities of the country and involves:

a)Adjusting repo rate, reverse repo rate etc. - These rates constitute a liquidity adjustment facility whereby the Central Bank determines how much reserves commercial banks should hold as requisite. Also, inter-bank interest rates are influenced to keep inflation in check.

b)Influencing the supply of money through open-market-operations and quantitative easing. Quantitative easing is especially a new gen monetary policy where a central bank buys longer-term securities from the open market to increase the money supply and thus encourage lending and investment

However fiscal policy is different due to the factors given below:-

Fiscal policy is undertaken by the government and involves

a)Level of government spending - This is in the form of expenditure on pubilc works or regulating the investment expenditure in the nation among different sectors.

b)Levels of taxation - Taxation and subsidies are instrumental tools by the government to catrry out the fiscal policy which helps to curb or encourage production as per the requirement of the economy. Basically to increase demand and economic growth, the government will cut tax and increase spending (leading to a higher budget deficit). At the same time, to reduce demand and reduce inflation, the government can increase tax rates and cut spending (leading to a smaller budget deficit)