Fiscal policy and monetary policy

Fiscal policy means it is an adjustment by the government with respect to levels of spending, which affects the national economy. On the other hand the Central Bank influences on money policy, which is a strategy of monetary policy. These two policies i. e. Fiscal policy and monetary policies will be used with various combinations to achieve country’s economic goals. FISCAL POLICY Fiscal policy is based on the theories of British economic John Maynard Keynes. It is also known as Keynesian economics. The theory indicates that the governments should influence to increase the product levels and to decrease the public spending and tax levels.

Such influence maintains the inflation with 2-3% besides to increase the level of employment. But the fiscal policy will not always same. It depends upon the political fluctuations. Because the government always wants to adjust spending and the policy makers may not accept in turn they issue new policies which advantageous to specific group. Providing the employment and minimizing the expenditure are more important in fiscal policy. So the government depends upon the political considerations. If the policy of decision is taken to construct a new bridge, it will generate employment and income.

Alternatively if a decision is taken to spend the money towards construction of space shuttle, it will not give such employment and income. The government always sees the level of fiscal policies. Because if the inflation is strong, the economy will be slow and will be in down position. At the time, the government uses the fiscal policy in order to increase the taxes in order to receive money, which was held up. MONETARY POLICY It is an aid to the economy in order to achieve full employment output with the stable prices. Monetary policy is powerful tool of the economy.

The Chairman of Federal Board who sometimes called second most powerful person in the U. S governs the monetary policy. The monetary policy one of the tools which influences in domestic economy. The second tool available to government is fiscal policy. The fiscal policy indicates how the expenditure can be financed by the government in respect of the goods/services provided in the country. In the democratic system, the government will organize systems i. e. unitary system and federal system. In the United States, the Federal Reserve is in charge of the monetary policy.

The interest rates influences the monetary policy. The currency board, regulatory committees and the central bank determine the rate and growth of the economy. Monetary policy is central bank’s action. It influences the availability and cost of money and credit. The monetary policy helps to promote the national economic goals. Monetary policy can be identified with the indicators like M1, M2 and M3. M1 refers the U. S. money stock and the currency held in such shapes like public, travelers checks, demand deposits etc. In respect of M2, M1 and savings accounts and time deposits etc.

In case of M3, the M2 plus large denomination time deposits. In the United States, the Federal Open Market Committee is policy-making body. The committee is formed under Federal Reserve System. The committee delegated its responsibility over monetary policy to the Manager of the System Open Market Account (SOMA). Every year the Federal Reserve authorizes the SOMA to implement monetary policy.


1. http://www. harpercollege. edu/mhealy/eco212i/lectures/moneypol/mp. htm 2. http://www. finpipe. com/fiscpol. htm 3. http://www. investopedia. com/articles/04/051904. asp

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