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Fiscal Policy Vs Monetary Policy
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Fiscal Policy refers to the government’s efforts to use its spending, taxes, transfer payments to smooth out the business cycle and maintain full employment without inflation. A government may apply expansionary fiscal policy during recession. That is, to run a Budget Deficit in the country. This can be done by increasing on government spending and to cut taxes in the country. Conversely, a government may apply contractionary fiscal policy during economic boom to curb possible inflationary pressure. Hence, the government may run a Budget Surplus in that situation. Monetary Policy refers to the government’s effort to control the money supply which in turn controls the aggregate demand in the economy. There are four (4) main tools to control the money supply: interest rate, Statutory Required Reserve (SRR), open market operation, and the reserve ratio. Generally speaking, out of the four tools mentioned above, interest rate is the most common tool applied by governments around the world. In this section, we will focus on interest rate alone. During the times of economic recession, a government may apply expansionary monetary policy in the economy. That is, to lower the interest rate, to bring down the cost of borrowing, thus, stimulate the economy. Similarly, during the times of economic boom, a government may apply contractionary monetary policy to curb possible inflation. |
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