Question

Tutorial 10/11 Week 12 Question 3 The Australian government has taken several actions to manage the economy in response to the corona virus. Select any 2 actions and classify whether they fall under Fiscal Policy or Monetary Policy by stating the tools used and the desired effect of the action. (4 marks each x 2 = 8 marks) Does an economy need both Fiscal and Monetary Policy? Support your answer by enumerating the limitations of each policy .

Answer 1

Explanation:-

A. The government is supporting and financing fast track infrastructure projects. This is a fiscal policy used by the government to create jobs in the economy. At this time, job creation is essential for the economy to function. This program will not only help create jobs but will also ensure that aggregage demand does not drop.

B. The interest rates are reduced. Along with this, the policy rate was cut by twenty five points. This is a monetary policy, lower interest rates means that the cost of taking a loan are reduced. This will induce businesses and households to take loans. This ensures the economy does not slip into recession.

C combination of both fiscal and monetary policies is needed to ensure that the economy does not experience huge economic fluctuations. Governments use both the policies based on what they are trying to achieve. The limitation with monetary policy is there is a time lag before the effect can be seen. Also, using monetary policy to keep interest rates low for a very long period may lead to a liquidity trap which is not good for the economy. On the other hand, fiscal policy also has limitations. It is easily influenced by political pressure and also largely depends on the multiplier effect. Since both policies have their own limitations, governments should use both the policies to ensure economic growth and macroeconomic stability.

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