Question

How is fiscal policy different from monetary

policy. Why are its effects direct, while those of

monetary policy are indirect in nature?​

Answer 1

Answer:

Expansionary monetary policy can have limited effects on growth by increasing asset prices and lowering the costs of borrowing, making companies more profitable. Monetary policy seeks to spark economic activity, while fiscal policy seeks to address either total spending, the total composition of spending, or both.

hope it helps you

Answer 2

Explanation:

Monetary Policy vs Fiscal Policy

23 April 2019 by Tejvan Pettinger

The aims of fiscal and monetary policy are similar. They could both be used to:

Maintain positive economic growth (close to long-run trend rate of 2.5%)

Aim for full employment

Keep inflation low (inflation target of 2%)

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

Overview of monetary and fiscal policy

monetary-vs-fiscal-policy

Reducing Inflation

fall-ad-full-capacity

To reduce inflationary pressures, the government or monetary authorities will try to reduce the growth of AD.

If we use fiscal policy, it will involve higher taxes, lower spending. The advantage of using fiscal policy is that it will help to reduce the budget deficit.

In a country like the UK, with a large budget deficit, it might make sense to use fiscal policy for reducing inflationary pressures because you can reduce inflation and, at the same time, improve the budget deficit.

However, It can be difficult to cut public spending (or increases taxes) for political reasons. This is why most economies have relied on monetary policy for the ‘fine-tuning’ of the economy.

Monetary policy

Raising interest rates is usually quite effective in reducing inflationary pressures. Higher interest rates increase the cost of borrowing and tend to slow down economic activity.

However, raising interest rates also affects the exchange rate. Due to hot money flows to take advantage of higher interest rates, the Pound is likely to rise. Therefore, deflationary monetary policy will have a greater effect on exporters.

Also raising interest rates has a bigger proportionate effect on homeowners with variable mortgage payments. The high level of mortgage payments means the UK is sensitive to interest rate changes.

Monetary policy has a disproportionate effect on the housing market and borrowers.

However, higher interest rates can be beneficial for savers who will gain a higher income. SImilarly, the period of very low-interest rates reduces income of those who rely on savings.

Therefore monetary policy doesn’t have an even impact throughout the economy; borrowers and savers will be affected differently.