Fiscal and Monetary policy
Fiscal and monetary policies are economic tools used by the government to control economic activities (Segal, Para 1). Fiscal policy is defined as the government decisions concerning a country’s spending and taxes and how the tools affect the national economy. In contrast, monetary policies are the activities of the Central Bank that are geared towards monitoring the amount of money in circulation and the credit in a nation’s economy. Both fiscal and monetary policy aims at controlling the expansion and contraction of a given economy.
Fiscal policy
The fiscal policy entails the use of government spending and taxation to control various aspects of the economy. The impact of fiscal policy affects the nation’s aggregate demand, wealth and income distribution, and investment and savings. They are two measures taken by a nation’s legislators to impact the nation’s economic activities, including automatic stabilizers and discretionary fiscal policies. The automatic stabilizers refer to the tools applied to a country’s budget to adjust its taxes and expenditure. Discretionary fiscal policies are categorized into expansionary and contractionary policies and are the most commonly used by the government to adjust the economy. Expansionary fiscal policy refers to the government measures that involve injecting more money into the economy. The expansionary policy aims at increasing the aggregate demand of the nation by increasing government taxation and expenditure. The government uses this policy by funding more on government projects such as infrastructure, which leads to the creation of employment, increased supply, and increased consumer expenditure, leading to the expansion of the economy. The government uses contractionary fiscal policy to slow down the economy during boom season. The government increases the taxation rates and reduces government expenditure, leading to low investment rates and low unemployment rates. The low investment rates and low unemployment rates result from the reduced amount of money in the economy for business and consumer expenditure (Amadeo, Para 1-9).
Monetary policy
The monetary policy is a tool used by the Central Banks of different nations to manage the macroeconomic factors of an economy, such as inflation and unemployment. The tools used in effecting monetary policy include interest rate management, buying or selling of government securities, and the amount of money circulating in an economy (Corporate Financial Institution, Para 1-2). The monetary policy objectives include inflation management, management of unemployment level, and managing the exchange rates of currencies. There are three primary tools of monetary policy used by the Central banks and include open market operation, interest rates adjustment, and adjustment of the bank’s reserves requirements. The Central banks use open market operations to meet their objectives by either buying or selling government securities. Buying government securities by the Central Bank increases the amount of money available for lending to the public, leading to inflation. Selling government bonds reduces the money supply in an economy. The Central Bank uses the interest rates to manage the money supply in an economy by adjusting the commercial bank’s discount rates. Increasing the discount rates discourages public borrowing by increasing the lending cost, thus reduced money supply while reducing the discount rates encourages public borrowing as the lending costs are low, increasing the money supply in an economy. The change of reserve requirements is another tool used by the central bank to manage the money supply. Increased reserve requirements for the commercial banks reduce the amount available for lending to the public, thus reducing the money supply and vice versa. Increased money supply in an economy leads to inflation, low unemployment level, and reduced forex rates. In contrast, reduced money supply leads to deflation, high unemployment rates, and high interests in forex (Corporate Financial Institution, Para 3-11).
REFERENCES
Amadeo, K. What is Fiscal Policy. The Balance. (2021). Retrieved from: https://www.thebalance.com/what-is-fiscal-policy-types-objectives-and-tools-3305844
corporate financial Institution. Monetary Policy. CFI. (2015) Para 1-11. Retrieved from: https://corporatefinanceinstitute.com/resources/knowledge/economics/monetary-policy/