Running head: ECONOMIC POLICIES 1

The Strengths and Weaknesses of Fiscal Policy and Monetary Policy

Student Name:

Institution Affiliation:
ECONOMIC POLICIES 2

Introduction

Economics is an area of great concern when it comes to many states and countries. Due to

this aspect, many of the countries have primarily relied on the use of fiscal and monetary policies

in influencing macroeconomic results or rather outcomes. The government often uses a fiscal

policy in analyzing and determining ways in which the central government gets revenues through

taxation in conjunction with how the money obtained is spent. Ultimately, cutting tax rates with

an increase in government spending is often a move taken by the central government to assist the

economy by cooling down an overheating economy. Additionally, not only will the central

government raise taxes but also cut on its spending.

On the other hand, monetary policy is often used by the central banks of a particular country

to manage the supply of money and interest rates. Ultimately, here, the central bank is responsible

for cutting interest rates to making it less expensive to borrow while increasing the money supply

to stimulate the stalling economy. If the economy of the country is rapidly growing than expected,

then the central bank will raise interest rates and remove money from circulation to establish a

tight monetary policy. Both fiscal and monetary policies impact the economy of a given country

in several ways, each having positive and negative aspects or rather advantages and disadvantages.

Overview of Fiscal and Monetary Policies

Functionally, the primary role of the fiscal policy used by most governments is targeting

the entire level and composition of spending in a given economy. Consequently, changes in

government spending and tax policies are often the main factors that affect a given fiscal policy

(Schiller, 2011). Therefore, when a given government notices that there is a decrease in the amount
ECONOMIC POLICIES 3

off business activities in the economy, it can save the situation by increasing the amount of money

that it spends. None the less the increased level of spending by the government is usually termed

as stimulus spending. Conversely, if the number of tax receipts responsible for paying for the

spending increases, then the government will be forced to lease money by giving debt securities;

inform of government bonds in which through the process debts are accumulated and hence

resulting in a phenomenon known as deficit spending.

Fiscal policies, as mentioned earlier, is often primarily used by the government in an

attempt to stimulate the available economy (Schiller, 2011). Moreover, the fiscal policy of a given

government can not only target specific communities but also investments, commodities, or

industries with the aim of both favoring and discouraging production. However, the given aspects

of fiscal policies are usually considered as entirely uneconomical based, raising lots of discussions

towards the given perspective. A point to note is also that fiscal policies often target the aggregate

demands in which given companies may also benefit due to increased revenues.

Contrarily, monetary policies, on the other hand, entail given actions that are taken by the

central government of a particular country towards fulfilling and achieving its macroeconomic

objectives. None the less, various central banks in a country can be endorsed with the role of

monitoring and targeting a given eve of inflation (Schiller, 2011). Moreover, many given states

globally often separate the monetary aspect of authority away from a country's political influence

that could ultimately adversely affect its functionality and mandate of the objective.

For a rapidly growing economy, this aspect might eventually lead to adversely increased

levels of inflation in which the central bank of a given country will be forced to restrict the policy

to manage the situation by tightening the money supply (Schiller, 2011). None the less, tightening

of the money supply will ensure that there is an effective reduction of the amount of money in
ECONOMIC POLICIES 4

circulation in the country and significantly lowering the rate at which money that is new goes into

the system. The two given policies at times often work interchangeably as they are closely related;

however, each have offered advantages and disadvantages regarding their functionality.

Strengths and Weaknesses of Fiscal and Monetary Policies

One may raise the question on which policy is more effective than the other. Firstly,

monetary policy is often useful as it is set by the central bank and aspect that makes it immune to

political influences. For instance, political leaders may, at times, want to cut the available interest

rates for their goods of which might adversely affect the economy. On the other hand, the fiscal

policy may bring about adverse supply effects on the entire economy in which for instance, the

government may be reluctant to lower the spending to reduce inflation and high taxes (Schiller,

2011). Moreover, the aspect of decreased expense could, at some point, lead to the reduction of

public services, and as a result, the higher income tax encountered leading to work disincentives.

According to monetarists, fiscal policy in terms of large budgetary deficits could bring

about an aspect of crowding out since increased government spending often disrupt the private

sector expenditure while, on the other hand, increased government borrowing simultaneously

increases the interest rates (Schiller, 2011). Unlike fiscal policy, the monetary policy in much

easier and quicker to implement to an aspect in which interest rates can be set each given month.

Moreover, when it comes to fiscal policy decisions towards increasing the government's level of

spending could take a long period to determine and conclude where to spend the money.

A point to note is that increased government spending or rather fiscal policy may lead to

the push for spending by special interest groups of individuals, which entirely disadvantageous to

the government as it may lead to difficulties in reducing the aspect at the end of the recession
ECONOMIC POLICIES 5

(Schiller, 2011). Conversely, in terms of reception, the monetary policy would have several

limitations, such as low rates and narrow targeting of inflation, which is often ignored.

Additionally, in terms of monetary policy, there is an aspect of liquidity trap whereby it might be

ineffective to cut the interest rates in a situation where the consumers are reluctant to spend and

the banks similarly to unwilling to lend money.

Monetary policy is limited by even quantitative easing, where the creation of money

becomes challenging and ineffective when banks decide to keep the surplus money in their balance

sheets (Schiller, 2011). On another dimension, demand is mainly created by government spending

and relatively leads to the removal of the economy out of recession. However, in the aspect of a

deep recession, then the given issue may be disadvantageous when the government only relies on

the monetary policy to reestablish the economy’s equilibrium.

Conclusion

In conclusion, the monetary and fiscal policies are different in the ways that they are used

to influence the economy of a given country. However, even despite the differences in their modes

of operation, they seem to be closely related as one may impact the functionality of the other.

Contrarily, monetary policy appears to be the most common strategy towards the economy that is

applied by most governments due to its numerous advantages as compared to fiscal policy.

Additionally, nothing gods come without a side effect or limitations. Thus, the monetary policy

can be concluded to be ineffective when it comes to aspects of a deep recession, among other

mentioned scenarios above.

ECONOMIC POLICIES 6

Reference

Schiller, B. R. (2011). The macroeconomy today. Tata McGraw-Hill Education.