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MONETARY POLICY VS FISCAL POLICY

MONETARY POLICY VS FISCAL POLICY

MONETARY POLICY

NEED FOR: If the monetary system of the country is unorganized then the balance of demand and supply of credit disturbs. Due to which the economic system of the country faces many difficulties. If the amount of credit increases in any country the country becomes inflation stricken, which leads to the problem of dearness. However, if the amount of credit decreases then the country becomes deflation stricken which leads to the less funding. Therefore, the central bank of any country takes various steps to maintain the balance of credit in the best interest of the country. These steps are called the tools of controlling credit or monetary policy.

Note: Inflation is a state in which the value of money is decreasing and prices are increasing. Deflation is a state in which the value of money is rising and prices are falling.

 DEFINITIONS OF MONETARY POLICY:

(1) Monetary policy refers to the measures which the central bank of a country takes in controlling the cash and credit supply in the country with a view to achieve specific important economic objectives or goals.

(2) Monetary policy is considered as the regulation of cost and availability of money and credit in the country.

 (OBJECTIVES)

1. Full Employment:

The main object of monetary policy is not only to maintain the Conditions of employment in the country but also to create more opportunities of employment in less developed countries.

2. Price Stability:

Maintenance of price stability does not mean to keep the prices fixed but to avoid inflation and deflation. The monetary policy is directed towards controlling inflation by decreasing the total amount of credit or containing its expansion with a desired limit and curing deflation by increasing it.

3. Exchange Rate Stability:

This means maintaining relative stability in the exchange rate i.e. external value of the country’s currency. It also means the maintenance of balance of payment in equilibrium or at least improves its position.

4. Equitable Distribution of Credit:

This is necessary for social justice because it helps lessening inequality of wealth and income, which increases the standard of living of people. Thus, the credit policy should be formulated in a way, which ensures increased flow of credit to backward areas and small borrowers.

5. Foreign Value of Currency:

Monetary policy helps in consolidating the, external value of local currency which leads to growth in trade.

6. Increase in Investment:

With the help of monetary policy, central bank plays a vital role in the enhancement of investment, which results in economic stability.

7. Deposits of Gold:

Economy of the country comes into trouble because of decrease or increase in the deposits of gold. These effects can be removed with the help of monetary policy.

8. Stability in Capital Market:

The development of any country relies on its stable capital market. The central bank takes help of monetary policy in order to create stability in capital market.

9. Production of Wealth:

Monetary policy plays an important role in increasing production of wealth, which helps to achieve full employment.

10. Control on Inflation and Deflation:

Central bank generates Economic stability by controlling inflation and deflation in the country.

11. Promotion of Economic Development:

This means the steady growth in the National Product and Per Capita Income. It requires best utilization of productive resources. Thus, with this objective the credit control policy aims at mobilization of monetary resources and ensuring their fuller and productive use.

12. Increase in Production:

With the help of monetary policy, various productive sectors are encouraged to get loans due to which a comprehensive increase in production can be expected.

FISCAL POLICY

Fiscal Policy Definition: It is the management of taxes and public expenditure to achieve the goals of economic growth with employment creation and stable prices. This policy must be consistent with other polices like monetary policy.

What is Fiscal Policy?

Public finance is managed by the government to influence the economy in a required direction. This is called fiscal policy. Economic policy is directed to achieve some goals and fiscal policy helps in achieving those goals. Government revenue and expenditure are the main item used to devise fiscal policy. How government collects revenue and in which areas? How the government spends those revenues and in which sectors? There are the questions that show how the fiscal policy is framed.

Objective of Fiscal Policy:

Fiscal policy has various objectives. These objectives are as follow:

1. Price stability

Inflation and deflation are normal features of a capitalist economy. Fiscal policy control both. Excess demand that causes inflation is tackled by increase taxes. On the other hand, in deflationary periods, a reduction in taxes can boost demand creating job and taking out the economy from deflation. Fluctuations in price not only badly affect the domestic economy but also have an impact on the exchange rates, the credit rating and the voting power in the IMF.

2. Influencing the Consumption Pattern

Government can influence the consumption patterns of her citizens. To reduce the consumption of luxuries, the government can impose heavy taxes on them. To encourage the consumption of things like computers, objects of entertainment and healthy food, the government can reduce or remove taxes on the objects.

3. Raising the level of the environment

Tax reduction in particular sectors of the industry creates more jobs. Similarly, the government can invest or spend in particular sectors of specified location to create jobs.

4. Redistribution of income

Unfair income distribution is a necessary outcome of capitalist economies and the situation is worse in developing countries. Redistribution is possible through system like progressive taxation. In the type of tax system, the rich are taxed at higher rate s than the poor.

5. Exchanged Stability

Stable exchange rate is highly dependent on exports, imports and remittances. The three can be influenced by a system of taxes and duties. The trade policy and fiscal policy join hands in achieving objective like boosting exports or reducing imports.

6. Resources Mobilization

Fiscal policy can influence the profitability of investment and saving and can be used to increase savings and investment in the economy. Resources are mobilized in this way. The government can not only use banking channels but can directly manage resources by an appropriate tax system.

7. Resource Allocation

Government allocates resources to different sectors and regions through budgetary mechanism. Resources allocation can be influenced by fiscal policy in two way:

  1. Fiscal incentives and disincentives including taxes, subsidies and duties encourage or discourage certain resource allocation patterns.
  2. A balance between sectors, location and industry or agriculture is required. The weaker sectors can be helped by fiscal policy in a direction required to create a balance.

8. Removal of Deficit in Balance of Payment (BOP)

Balance of trade gaps can be bridged by fiscal policy. Increase in exports, reduction in imports and encouragement to specific exports improves the balance of trade situation.

9. Economics Development

Lowering the taxes, increasing the government expenditure and granting subsidies to specific producers to increase production in the economy boost economic activity. Better incentives to local and foreign investors improve the investment environment. Job creation is another important factor can lead to economic development of poor countries.

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