Question

- What are the tools used in the Fiscal Policy?

What are the tools used in the monetary policy?

What are the tools the FED use to control money supply?

Answer 1

Fiscal policy can be defined as a tool through which a government adjusts its spending levels and tax rates to monitor and affect its own country economy.

Fiscal policy tools are;

Government spending includes spending on the health, education, infrastructure and other government expenditure for country development.

Tax is the compulsory payment to the government by the people of the country for which people does not get anything in return directly.

Monetary policy can be defined as the macroeconomic policy which is used by the central bank of the country.

Monetary policy tools are;

Quantitative tools;

1. open market operation; it contains selling and buying government bonds.

2. Bank rate; it is the rate at which central bank lends to the commercial banks.

3. Cash reserve ratio; it is the ratio of the total deposit with the bank which a bank has to keep with the central banks.

4.

Statutory liquidity ratio; It is the ratio of the total deposit which a bank has to keep in the bank in the form of cash.

Qualitative tools ;

1.Fixing marginal requirements; it is that fraction of a loan which a borrower has to bring for getting finance for his purpose.

2. Consumer credit rationing; In this method, consumer credit supply is controlled by hire-purchase and installment sale of consumer goods.

3. Credit rationing; According to this rule the Central Bank fixes credit amount to be granted and Credit is rationed by limiting the amount available for each commercial bank.

The tools the FED use to control money supply;

1 . Bank rate; it is the rate at which central bank lends to the commercial banks.

2. Cash reserve ratio; it is the ratio of the total deposit with the bank which a bank has to keep with the central banks.

3.Statutory liquidity ratio; It is the ratio of the total deposit which a bank has to keep in the bank in the form of cash.

4. Open market operation; it contains selling and buying government bonds.