Monetary vs Fiscal Policy by Anuj Gupta Jaipuria Institute of Management Noida

           Monetary vs Fiscal policy   

  ( Anuj Gupta)  
 Under the guidance of : Prof. Ritika Gugnani

QUESTION : When the economy is doing badly, should we do something to try to fix it,or should we leave it alone? 

Monetary policy is one of the ways that governments attempt to control the economy.

The monetary authority of a country (usually a central bank) controls the supply of money, often targeting a certain interest rate for the purpose of promoting economic growth and stability.

Expansionary monetary policy is used to increase economic growth. The target growth rate is somewhere around 2%, because we want growth without causing too much inflation.

Contractionary monetary policy is used to slow  economic growth. The goal is not to cause recession, but to temporarily slow growth to lower inflation.

How do we increase economic growth?

One way to increase growth is to lower the interest rates that people pay on loans  If people save money by paying low rates for the money they must borrow, they will have more money to spend: this money will circulate back into the economy, helping businesses grow and prosper.

Why lower inflation?

High inflation causes the purchasing power of consumer money to decrease, which means people will be forced to buy less. Ultimately, high inflation can lower

nationwide demand, and cause economic recession.

How do we lower inflation?

Raising interest rates on loans helps slow economic growth, because people will be forced to pay more when they borrow money from banks. People have less money to spend in the economy, the lack of money flowing into the economy causes recession, and recession lowers inflation.

Fiscal policy is another way that governments attempt to control the economy. Governments adjust tax rates and government spending for the purpose of promoting economic growth and stability.

How does lowering taxes create growth?

If people are paying less in taxes, they have more money to spend or invest. Increased consumer spending or investment could improve economic growth.

Governments don’t want to see too great of a spending increase though, as this could increase inflation.

How does gov. spending create growth?

The government might decide to increase its own spending – say, by building more highways. The idea is that the additional government spending creates jobs and lowers the unemployment rate.

Follow the Given Links for More Details

https://www.youtube.com/watch?v=KJIHxkf9ipY

https://www.youtube.com/watch?v=T96dzDAPZvo


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