Question

Enumerate 2 differences between fiscal policy monetary policy. Please explain it clearly and comprehensively

Answer 1

Ultimately, government strategy is reflected by its borrowing and spending operations. In this reading, two forms of government policy that can impact the macroeconomic and financial markets are described and discussed: monetary policy and fiscal policy.

Monetary policy refers to operations of the central bank that are targeted at manipulating an economy's volume of liquidity and credit. Fiscal policy, by contrast, applies to the government's taxes and expenditure decisions. In order to control economic growth over time, both monetary and fiscal policies are used. They can be used to stimulate growth when an economy begins to slow or, when an economy begins to overheat, to moderate growth and activity. Furthermore, to redistribute profits and wealth, monetary policies should be used.

Usually, the overall aim of both monetary and fiscal policy is to create an economic climate in which productivity is steady and optimistic and inflation is steady and minimal. Crucially, however, the goal is to direct the underlying economy to prevent global booms, which can be accompanied by protracted periods of poor or negative inflation and elevated unemployment rates. Householders can be comfortable in their spending and saving choices in such a prosperous economic climate, while companies can rely on their investment decisions, make their daily coupon payments to their bondholders and making money for their shareholders.

When economic growth weakens or while it is in crisis, an expansionary monetary policy may be implemented by a country , for example, by raising expenditures without an increase in taxes being offset. Conversely, a contractionary policy may decrease economic activity by decreasing spending and retaining tax revenues. Therefore, monetary policy may play a major role in stabilising an economy.

While aggregate demand can be altered by both fiscal and monetary policy, they act across separate channels, so policies are not synonymous and can act against each other unless the government and central bank align their targets.