Monetary Policy Vs. Fiscal Policy
Monetary Policy vs. Fiscal Policy
A country must always prepare and pursue a suitable monetary policy to evade the incidence of booms as well as slumps. If they still come about, monetary weapon must be wielded to mitigate their severity and also to restore economic stability as early as possible.
Monetary policy holds credit and banking policy involving interest and loan rate in addition to management of public debt and monetary standard. It controls the amount of credit base and, with it, the size of bank credit and consequently the broad stage of economic movement and prices. We know the usual methods through which monetary policy works. By way of recapitulation, the important ones among such methods are: manipulation of bank rate and open market operations. When boom situations are emergent, bank rate is increased and consequently credit is constricted with the resultant stoppage upon the excessive development of industrial movements. Whereas in depression, a monetary policy of cheap money may be employed to motivate industrial investment and consequently help economic revival.
The inadequacy of monetary policy led, therefore, to the search for suitable supplementary methods. Fiscal policy was the most important new find. But, for reasons to be explained presently, this new method, though it was "designed to supplement and strengthen monetary policy, has ended up by threatening to supplant monetary policy altogether." (Williams). As, public expenses in all current States comprises a moderately adequate quantity of the entire national income, fiscal policy is evident to influence the price levels, employment as well as production irrespective of the reality whether this policy is intentionally intended at this or not.
Fiscal Policy, broadly speaking, consists of:
(a) A policy of public works or public spending. (b) Appropriate taxation.
As per Keynes's explanation, trade cycle is principally resulting owing to imbalance between actual investment and savings. Hence, if the capital expenditures of the public bodies as well as the state could be accustomed to the changeable personal investments, disequilibrium can be barred from occurring, and therefore economic strength protected. And if the equilibrium has in some way draw closer, it can be corrected by changing public spending.