Fiscal and Monetary Policy

Topics: Inflation, Monetary policy, Macroeconomics Pages: 4 (1282 words) Published: November 3, 2008
Fiscal and Monetary Policy Essay

In order to achieve economic objectives, fiscal and monetary policies are implemented by the government. Monetary policy is used to moderate demand and output growth while also reducing inflation in the medium term. Effects of monetary policy are less direct than those of fiscal policy and involve policy measures implemented through the Reserve Bank to bring about changes in aggregate demand by influencing money supply and interest rates. The Reserve Bank controls money supply by affecting the level of reserve assets held by financial institutions. This is done by trading assets in government securities. As the effect of change in money supply on aggregate demand is indirect, it is argued that monetary policy is less effective than fiscal policy in stabilizing the economy. Fiscal policy is also aimed at influencing a nation’s aggregate demand and includes measures undertaken by the government in relation to raising revenue through taxation. Fiscal policy is concerned with achieving the short-run objectives of full employment or price stability and is implemented through the Federal Government’s yearly budget. Fiscal policy can be implemented through either discretionary or non-discretionary measures. Non-discretionary elements of fiscal policy occur automatically to counteract inflation or deflationary trends and can also be referred to as automatic stabilizers. These automatic stabilizers include income tax, unemployment and welfare benefits. On the other hand, discretionary elements of fiscal policy are deliberate and focused actions taken by the government to increase or decrease aggregate demand.

Fiscal and monetary policies are used to achieve the government’s economic objectives. The objectives of the government include price stability, which is measured through the Consumer Price Index or CPI and external stability, which is measured using the Balance of Payments. Other economic objectives include maintaining...
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