Monetary and Fiscal Policy

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Monetary and Fiscal policy What is the difference between fiscal and monetary policy? Monetary policy is typically implemented by the central bank, and refers to actions which influence the availability and cost of money and credit, as a means of helping to promote economic growth and price stability. Tools of monetary policy include open market operations, the discount rate and reserve requirements. Fiscal policy decisions are set by the national government, and include decisions about the amount of money it spends and collects in taxes to achieve full employment and a non-inflationary economy. However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run. In general, expansionary monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) in the quarters ahead; tight or contractionary monetary policy is designed to slow the economy in the future to offset inflationary pressures. Likewise, expansionary fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run, while contractionary fiscal policy, tax increases and spending cuts tend to slow the rate of future economic expansion. Question 2 The workings of Monetary and fiscal policy The aim of all governments is to achieve and maintain economic growth and price stability. However, when the economy is in an inflationary situation, there is the need to implement policies to reverse this trend; these policies are referred to as contractionary fiscal policies. This article seeks to highlight the workings of Monetary and Fiscal policies. Contractionary Policy Effects • Contractionary policy is any government policy aimed at reducing aggregate output (Y). • Why would the government want to reduce Y? One purpose is to
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