Question

fiscal and monetary policy each have certain advantages and disadvantages. These involve the time required to create the policy, and the ability of the two policy categories to deal with certain circumstances (like recessions vs. expansion). Describe the relative strengths and weaknesses of both policy options.

Answer 1

Answer : Fiscal policy are the policy that governed by the government . It is policy governed by government through cutting tax rate or Government spending influence a lot at this level of output.

Advantage in case of expansionary policy adopted in an economy are :

• It can resulted in higher domestic Interest rates .
• It can increase forgien demand for dollars.
• Dollar has been appreciated.
• Economic has been free from recession and growth has been started.

Weakness of expansionary fiscal policy are :

• Higher borrowings resulted from it.
• Financial crowding out.
• Increase in the size of government budget deficit.

Contractionary fiscal policy are :

Advantage :

• Government budget deficit has been decreased.
• Control on inflation in an economy.

Weakness of contractionary fiscal policy are :

• Decrease in aggregate demand due to cut Government spending from an economic.
• Decrease the growth of an Economy.
• GDP rate has been slow down.

Monetary policy are hold by the central or Federal Bank .It involved management of money Supply in an economy.

Strength of expansionary monetary policy are :

• Boost economic growth
• Increased Business investment.
• Creation of employment and enhanced purchasing power.

Weakness of expansionary monetary policy are :

• Higher rate of inflation in an economy.
• Increase in price of goods and services.

Strength of contractionary monetary policy are:

• Inflation has been reduced in an economy
• Price of goods has been lower down.

Weakness of contractionary monetary policy are :

• Economic growth has been slow down.
• Unemployment increases.
• Productivity has been slower down tremoundsly.