Question

Discuss in detail the monetary and fiscal policy for economic stabilization

Answer 1

The principal aim of fiscal and monetary policy is to reduce cyclical fluctuations in the economic cycle. In recent years, governments have often relied on monetary policy to target low inflation. However, in recessions, there are strong arguments for also using fiscal policy to achieve economic recovery.

Fiscal policy involves changing government spending and taxation. It involves a shift in the governments budget position. e.g. Expansionary fiscal policy involves tax cuts, higher government spending and a bigger budget deficit. Government spending is a component of AD.

Monetary policy involves influencing the demand and supply of money, primarily through the use of interest rates.

Monetary policy can also involve unorthodox policies such as open market operations and quantitative easing.

Monetary policy is usually carried out by an independent Central Bank