Monetary and Fiscal Policy

Monetary and Fiscal Policy

Monetary and fiscal policies are the two most widely used tools to regulate a country’s economic activity. Monetary policies are implemented by central banks to regulate interest rates and money in circulation. In contrast, fiscal policies are implemented by the government and are concerned with government spending and taxation.

It is appropriate to use monetary and fiscal policy in stabilizing or stimulating the economy when the collective demand for services and goods exceeds or is less than the aggregate supply. Cole (2020) argues that monetary policy is therefore used in such instances to control the total supply of money being distributed in the economy, while fiscal policy is used to regulate government spending.

According to Rommerskirchen (2019), it is inappropriate to use fiscal and monetary policy in stabilizing or stimulating the economy during a recession because it would lead to low interest rates, loosening of reserve limits, and purchase of bonds in exchange for the money that has been created.

The specific fiscal policy tools that I would use in stimulating aggregate demand are government spending, taxes, and government spending. I would use them by increasing government spending, increasing government transfers, and decreasing taxes.

Expansionary monetary policy tools are most appropriate in stimulating aggregate demand because they increase monetary expansion, thus boosting economic growth (Tsoukis, 2020). I would use expansionary fiscal policy tools by decreasing interest rates, reducing reserve requirements, and expanding operations in open markets. Reducing short-term interest rates would lower commercial banks’ borrowing costs, enabling them to lower interest rates for their customers. The customers then borrow money from the banks hence increasing the amount of money circulating in the economy.

Policymakers should use monetary policy to stimulate aggregate demand because monetary policy is more friendly to consumers. When monetary policy is used, consumers can be guaranteed that prices will remain stable, and they can budget better and initiate the transactions they want based on the money they have. Policymakers should also use monetary policy to stimulate aggregate demand because it reduces the risk of the government taking advantage of the consumer to meet political interests.

References

Cole, H. L. (2020). Optimal monetary and fiscal policy. Monetary and Fiscal Policy through a DSGE Lens, 219-232. https://doi.org/10.1093/oso/9780190076030.003.0021

Rommerskirchen, C. (2019). Theorizing fiscal policy coordination. EU Fiscal Policy Coordination in Hard Times, 26-44. https://doi.org/10.1093/oso/9780198829010.003.0003

Tsoukis, C. (2020). Monetary policy. Theory of Macroeconomic Policy, 347-416. https://doi.org/10.1093/oso/9780198825371.003.0007

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Monetary and Fiscal Policy

As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard:
a. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy?
b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy?
c. What specific fiscal policy tools would you use to stimulate aggregate demand and how?
d. What specific monetary policy tools would you use to stimulate aggregate demand and how?
e. What is your conclusion? Should policymakers use monetary and or fiscal policy to stimulate aggregate demand? Explain briefly.