Question

You have received a number of questions regarding fiscal, monetary, and exchange rate policies and how they can be used to stimulate and sustain economic growth in Africa. Prepare a paper that you will distribute responding to these questions.

Hint: Discuss each of the policies using the demand and supply side effects of the various policies also the limitations of each. Each policy discussion is 10 marks

[30 marks]

Answer 1

The purpose of this paper is to mark all the elements and functions of Government’s monetary and fiscal policies. Monetary policy is the one which is associated with controlling money supply in the economy. This is generally carries out by Reserve Banks. Under monetary policy, Fed uses open market operations to control the money supply in the economy. Other than that, Fed sets the discount rates and reserve ratio requirements for banks in order to control the money supply in the economy. This also have an impact on the country’s inflation. According to Dr. Robert, Fed when used the monetary policy at the time of great depression, it impacted the economy greatly. Limitations include the following: Monetary policy cannot drive stability in the economy alone. It has to be combined with a fiscal policy to achieve that. Other limitation says that the monetary policy cannot generate full employment in an economy and the reason for that would be time lags between implementation of policy and effects of the policy.

Fiscal policy is the one associated with the income and expenses of the government. It concerns the taxes and taxes revenues. The both policies are of great importance to an economy. The growth is generated or redirected with these policies in any country. Under fiscal policy, the policies that are used by the government are changing spending policies as well as changing income policies. Changing income policies implies here increasing tax rates in order to increase tax revenue. Limitations include- Sometimes, government end up caught in fiscal deficit. This happens when there is more government spending than revenue. It influences the business activity in an economy. Other limitation would be - There exists an operation lag when fiscal policies are applied. The time lag between when the policy is introduced and the time when it has started to show results is the operational lag. This hampers the growth process and can destabilize the economy.

Exchange rate policies are the policies which manages country’s currency in relation to foreign currency and market. It is a rate at which domestic currency can be seen in terms of foreign currencies. This plays a very important role in all the international trade. This also affected the domestic cost of production and domestic market. The exchange drives the imports and exports which influences the consumer’s demand on the basis of prices. The changes in exchange rate changes the import prices which affect the demand of products consumed domestically and also the government revenue and expenditure on imported products. These rates changes by buying and selling of either of the countries on exchange rate market. Limitations includes- If things go bad in terms of speculating and changing currency values, this could slow down the international trade. Other limitation would be- this is short term. According to World Bank, exchange rate policies are usually used for short term to maintain the stability in the economy but should not be carried forward in the long run.

Perhaps, it is said by the economists that these policies can have counter effects also but when focused on the positive side, they get along really good from the economy’s point of view. They stimulate the growth in GDP and income in an economy when in need.