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Monetary_and_Fiscal_Policy

Monetary policy involves actions by a central bank to manage money supply, interest rates, and liquidity to control inflation and promote growth. It includes expansionary and contractionary policies, using instruments like interest rates, open market operations, and reserve requirements. Fiscal policy, controlled by the government, uses taxation and spending to influence the economy, with expansionary and contractionary types aimed at stabilizing economic activity.

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6 views3 pages

Monetary_and_Fiscal_Policy

Monetary policy involves actions by a central bank to manage money supply, interest rates, and liquidity to control inflation and promote growth. It includes expansionary and contractionary policies, using instruments like interest rates, open market operations, and reserve requirements. Fiscal policy, controlled by the government, uses taxation and spending to influence the economy, with expansionary and contractionary types aimed at stabilizing economic activity.

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Monetary Policy

Monetary policy refers to the actions taken by a country’s central bank to


regulate the money supply, interest rates, and overall liquidity in the
economy. The main goal is to control inflation, stabilize the currency, and
promote economic growth.

Types of Monetary Policy:

1. Expansionary Monetary Policy – Used to stimulate economic growth


by lowering interest rates and increasing money supply. This
encourages borrowing and investment but can lead to inflation.

2. Contractionary Monetary Policy – Used to control inflation by raising


interest rates and reducing money supply, which discourages
excessive borrowing and spending.

Instruments of Monetary Policy:

Interest Rates (e.g., Central banks raise or lower rates to influence


borrowing and spending)

Open Market Operations (Buying or selling government bonds to adjust


money supply)

Reserve Requirements (Setting the minimum reserves banks must hold,


affecting their lending ability)
Example:

If inflation is too high, the central bank may increase interest rates to
reduce spending and slow down inflation.

Fiscal Policy

Fiscal policy refers to the government’s use of taxation and public


spending to influence the economy. It is controlled by the government, not
the central bank, and is used to manage economic stability and growth.

Types of Fiscal Policy:

1. Expansionary Fiscal Policy – Involves increasing government


spending and cutting taxes to boost economic activity, often used
during recessions.

2. Contractionary Fiscal Policy – Involves reducing government


spending and increasing taxes to slow down inflation and reduce
budget deficits.

Instruments of Fiscal Policy:

Government Spending (Investing in infrastructure, healthcare, and


education to stimulate growth)

Taxation (Adjusting income and corporate taxes to influence consumer


spending and business investment)
Example:

During an economic downturn, the government may reduce taxes and


increase public spending to boost demand and create jobs.

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