Question

• The role of fiscal & monetary policy and how both tools are used by in setting, evaluating and changing economic policy.

Answer 1

Fiscal policy comes under the purview of the government for influencing aggregate demand by influencing taxation and government spending. To stimulate aggregate demand, the government will reduce taxes and increase spending. To control inflation and reduce aggregate demand, the government will increase taxes and reduce spending.

Monetary policy is controlled by the Central bank. Monetary policy is the macroeconomic policy used by the Central Bank to manage the nation's money, credit and banking system. The objectives of monetary policy are to achieve full employment, promote economic growth, stabilize price levels and achieve equilibrium in the balance of payments. The three instruments of monetary policy are: open market operations, reserve requirements and discount rate.

To stimulate the economic growth, the central bank will reduce interest rates, to spur investments and increase money supply. To reduce economic growth, interest rates will be hiked and money supply decreased.