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FISCAL AND MONETARY POLICIES

Macroeconomics

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Anike Range-Todd
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4 views

FISCAL AND MONETARY POLICIES

Macroeconomics

Uploaded by

Anike Range-Todd
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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In macroeconomics, fiscal and monetary policies are key tools used by

governments and central banks to influence a country's economic


performance, particularly to achieve objectives like stable growth, low
unemployment, and controlled inflation. Here's an overview of each:

Fiscal Policy

 Definition: Fiscal policy involves government decisions on taxation


and public spending to influence the economy.

 Key Components:

1. Taxation: Adjusting tax rates to either stimulate spending and


investment (lower taxes) or reduce inflationary pressures
(higher taxes).

2. Government Spending: Increasing or decreasing public


expenditure to boost economic activity or control excessive
demand.

 Objectives:

o Stimulate economic growth during a recession.

o Reduce deficits or debt over time.

o Redistribute income for social equity.

 Example: A government increasing infrastructure spending during a


recession to create jobs and stimulate demand.

Monetary Policy

 Definition: Monetary policy refers to central bank actions to


manage the money supply and interest rates to stabilize the
economy.

 Key Tools:

1. Interest Rates: Raising or lowering rates to control borrowing


and spending.

2. Open Market Operations: Buying or selling government


bonds to influence liquidity.

3. Reserve Requirements: Adjusting the amount of reserves


banks must hold to control lending capacity.

 Objectives:

o Control inflation.
o Stabilize currency value.

o Promote economic growth and employment.

 Example: A central bank lowering interest rates to make borrowing


cheaper, encouraging businesses and consumers to spend.

Differences Between Fiscal and Monetary Policy:

Aspect Fiscal Policy Monetary Policy

Government (Ministry of
Authority Central Bank
Finance)

Taxes and government Interest rates, money


Tools
spending supply

Implementation Slower, requires legislative Faster, decided by


Speed approval central bank

Redistribution and public Stabilizing currency and


Focus Area
investment inflation

Both policies are often used together to manage an economy effectively.

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