Question

1. Evaluate the differences between Monetary and Fiscal Policy. +/-250 words

Answer 1

Monetary policy is related with key interest rate changes by Central Bank of a country. It is announced by Apex Bank periodically i.e., in each quarter to regulate flow of money in the economy. To control inflation rate, unemployment rate and also boost economic growth, Reserves Bank in its periodic monetary policy announces alteration in cash reserve ratio(CRR) that affects borrowing and deposit rates in the economy. In USA, Federal Reserve System is the apex bank responsible for alteration in key interest rates depending upon current inflation rate, market demand and supply condition, industrial growth and other economic parameters.

Fiscal policy is related with Federal Government of a country. It is a set of tax measures and budget allocation plans of the Federal Government for a fiscal year. The purpose of both Fiscal and monetary policies are to boost economic growth, employment and check the prices of essential items. To mop up additional resources for heavy public projects, Federal Government may raise existing tax rates, abolish some tax exemptions and impose surcharges on some sectors. Similarly Federal Government in its fiscal policy may raise or decrease budgetary allocations on some sectors. If Federal Government fails to collect desired tax revenues then it can borrow money from capital market by selling debentures and government bonds. When government have high fiscal deficiet, it may affect government spendings on different programmes. Raising tax rates is the last instrument that any federal government want to use as it will create additional burden on the common people that will also affect overall market demand. Monetary policy do not affect economy too much but Fiscal policy have deep impact on domestic investment, demand and supply, inflation and employment rate.