Question

INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE RELATIONS BETWEEN THEM!

• Monetary-fiscal policy mix & confidence band;

Answer 1

Monetary Policy helps us understand the Monetary Expenses of the Govt. and it's relation with the interest rate changes. These policies help the govt. during times of recession, business boom as well as during times of inflation. Whereas, Fiscal policies emphasises upon Taxation and government Spending, hereby implicitly influencing the economic health of the government. A policy mix between the two would mean a policy where monetary as well as fiscal policy go hand in hand. An example makes the point clear. eg. In 2008 crisis, what the US govt. did was, it passed fiscal stimuls, so as to increase spending and hence cut down taxes. The Fed undertook an expansionary monetary policy and cut down interest rates.

A confidence band is related to confidence interval. It is the line fitted on the probability plot that depicts the upper and lower limits of the confidence boundaries..

A relation between both can be derived if in case, an analysis is undertaken as to whether a Fiscal- monetary Mix would be effective enough in implementing the economic policies of an economy because in that case we need to forecast the effectiveness of the policies and that can be done by means of a Confidence Band . A 5% Confidence would mean a better policy implementation, whereas, A 1% band would mean a lesser confidence and so on.