Monetary and Fiscal Policy

1496 Words3 Pages
bulb-icon

Recommended:  the impact of Monetary and fiscal policy

Monetary Policy

Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) controlling money in the economy so as to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest so as to attain a set of objectives aiming towards growth and stability of the economy.

Monetary policy is said to be expansionary when it increases the total supply of money in the economy more rapidly than usual. But it can also be termed as contractionary if it expands the overall money supply in a slower rate or shrink it. The price at which money can be borrowed at is usually referred to as the economy’s interest rates. The main aims of monetary policies are: control inflation, control economic growth, unemployment and the exchange rates.

Different economies in the world experience varying economic difficulties demanding for varying solutions. The economic problems vary with the economical stability of the particular country and the ability to take adequate preventive measures. This has driven the economists to classify the monetary policies into different categories. Here are some of the types of monetary policy:

Inflation targeting: This is a type of monetary policy whose primary aim is to keep the inflation at a certain desired range. This is maintained for a period varying from months to years reviewable in a monthly or quarterly basis by a policy committee. The inflation target is achieved through periodic adjustment on the central bank’s interest rates.

Price level targeting: In price level targeting, the consumer price index growth is one year over or ...

... middle of paper ...

...nomic growth. This puts the economies in a tight place trying to balance the two contradicting but important goals. As a result attempts to implement a fiscal policy bear little or no fruits (Jha, 2007).

References List

Bernanke S. Ben, 2006. Monetary Aggregates and Monetary Policy at the Federal Reserve.

Retrieved from: http://www.library.auckland.ac.nz/instruct/ref/harvard.htm.

Bhattacharya Rudrani Ila & Shah Patnaik Ajay, 2011. Monetary Policy Transmission In An

Emerging Market Setting. Retrieved from: http://www.nipfp.org.in/working_paper/wp_2011_78.pdf.

Jha Rhagbedra, 2007. Fiscal Policy in Developing Countries. Retrieved from:

http://www.crawford.anu.edu.au/acde/asarc/pdf/papers/2007/WP2007_01.pdf.

Lipsky John, 2010. Fiscal Policies Challenges in Post-Crisis World. Retrieved from:

http://www.imf.org/external/np/speeches/2010/032110.htm.

Show More
Related

  • The U.S. Free-Enterprise Economy

    788 Words  | 2 Pages

    Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.

    Read More

  • Uganda: A Country in Need of Economic Growth

    1186 Words  | 3 Pages

    Stratmann, Thomas, and Gabriel Okolski. "Does Government Spending Affect Economic Growth? | Mercatus." Mercatus. 10 June 10. Web. 20 Nov. 2011. .

    Read More

  • Three Pillars Of The Classical Gold Standard

    1106 Words  | 3 Pages

    In the past, the system of monetary policy is based on the Classical Gold Standard. In the article, “Review of: European monetary union: Lessons from the classical gold standard”, Stanley W stated how the gold standard lasted from the periods of 1880 to 1913. In the beginning, central banks used interest rates to drive short term capital inflows, which avoided gold movements and made sure that the prices adjust relatively. However, this adjustment process didn’t work. The author then argued that long term international capital flows, migration, and differences in tariff barriers, also known as the “Three Pillars of the Classical Gold Standard”, contributes to the reason why developing countries were able to maintain their current account deficits until they could face the competition with the modernized countries. However, in accordance to the article “Interest rate interactions in the classical gold standard, 1880-1914: Was there any monetary independence?” by Bordo and Macdonald, the Classical Gold Standard is not a sustainable monetary system because it required some countries to be independent when monetary policy operates. This is especially conflicting in the modern day structure in which central banks need to use a targeting zone to achieve their purpose. In the modern era, quantitative easing (QE) is an unconventional type of monetary policy used by the Federal Reserve to respond to the deep recession. According to the article “Quantitative easing and Proposals for Reform of Monetary Policy Operations: by authors Scott and L.Randall, the impact of conducting QE on interest rates is lower long term yields when compared to the short term ones. As noted by authors Bora, Omar and Georges in their article “Financial Crisis and...

    Read More

  • Monetary and Fiscal Policies

    1093 Words  | 3 Pages

    Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand.

    Read More

  • Fiscal Policy Essay

    568 Words  | 2 Pages

    Everyone has their own political leaning and that leaning comes from one’s opinion about the Government. Peoples’ opinions are formed by what the parties say they will and will not do, the amounts they want spend and what they want to save. In macroeconomic terms, what the government spends is known as fiscal policy. Fiscal policy is the use of taxation and government spending for the purposes of stimulating or slowing down growth in an economy. Fiscal policy can be used for expansionary reasons, which is aimed at growing the economy and increasing employment, or contractionary which is intended to slow the growth of an economy. Expansionary fiscal policy features increased government spending and decreases in the tax rates as where contractionary policy focuses on lowering government spending and increasing tax rates. It must be understood that fiscal policy is meant to help the economy, although some negative results may arise.

    Read More

  • Monetary and Fiscal Policy

    1405 Words  | 3 Pages

    Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest to attain a set of objectives aiming towards growth and stability of the economy. Here are some of the monetary policy tools:

    Read More

  • Current Monetary Policy Of The United States

    2057 Words  | 5 Pages

    The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.

    Read More

  • Pros And Cons Of Expansionary Fiscal And Monetary Policies

    1569 Words  | 4 Pages

    Expansionary Fiscal and Monetary Policies are economic policies used by the government to level out the extreme swings in our economy. Due to the previous state of the US economy, the Federal Government had

    Read More

  • What is the Multiplier Effect?

    1296 Words  | 3 Pages

    In time of economic crisis the government has a choice to cut spending or increase spending for public goods and services. “In 2009, Congress passed the American Recovery and Rein- vestment Act, which authorized $787 billion in spending to promote job growth and bolster economic activity”(Stratmann/Okolski 3). John Maynard Keynes, an economist of 20th century, suggest that the government should run a deficit if it will create jobs and increase capital gain. This theory support the current stimulus package that has been introduce during President Obama’s term. Although the flaw with this concept is that it makes the assumption the government has done studies and understands which areas needs the funding the most and knows where it will be beneficial, realistically that is not true. “Federal spending is less likely to stimulate growth when it cannot accurately target the projects where it will be most productive” (Stratmann/Okolski 2). This can be seen because political figures will spend money where it directly supports their needs as well. For instance, the political figure would rather spend money to things that will yield a p...

    Read More

  • Federal Reserve System Case Study

    740 Words  | 2 Pages

    According to federalreserveeducation.org, the term "monetary policy" refers to what the Federal Reserve, the nation 's central bank, does to influence the amount of money and credit in the U.S. economy, (n d). The tools used are diverse but the main ones are:

    Read More

  • Government Spending versus Tax Cuts: How Best to Stimulate Growth?

    1470 Words  | 3 Pages

    After analyzing the data and the theory, we have provided our conclusion weather tax cut is better for the stimulation of growth or Government spending is? This report explains the big macroeconomic debates of the present times. It seeks to explore the debate within fiscal policy itself between tax cuts and government spending. We have tried to explain the argument through some theories and through some data collected from Indian econ...

    Read More

  • Toyota Products, Services, and Prices

    1088 Words  | 3 Pages

    One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.

    Read More

  • Macroeconomic Policy Essay

    999 Words  | 2 Pages

    If these monetary policies are left unchecked and allowed to be allocated freely, money and credit flows, proportion, cost and direction are unlikely to achieve some specific macroeconomic policy objectives that are liable to changes from time to time depending on the economic fortunes of a particular country. This was effectively converse by (Friedman, 1968.), whose position is that inflation is always and everywhere a monetary phenomenon while recognizing that increase in money supply in the short run can reduce unemployment and at the same time, can create inflation and so the monetary authorities should increase money supply with caution.

    Read More

  • Inflation And Inflation Essay

    1766 Words  | 4 Pages

    Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.

    Read More

  • Importance Of Economics

    705 Words  | 2 Pages

    Most policies are created according to economic condition, because government want prevent the bad result, and government also spend lots of money to hire economists. The monetary policy, for example, is that which relate to economics, the main idea of monetary is the lower interest rates reduce the cost of borrowing, encouraging investment and consumer spending. Lower interest rates also reduce the incentive to save, making spending more attractive instead. Lower interest rates will also reduce mortgage interest payments, increasing disposable income for consumers.And government also have amount of policy which relates to

    Read More

More about Monetary and Fiscal Policy

Open Document