CATEGORY: economics Topic: Banking Monetary policy and fiscal policy refer to the two most widely recognized “tools” used to influence a nation’s economic activity. Monetary policy is primarily deals with the management of interest rates and the total supply of money in circulation. It is generally carried out by central banks such as the Federal Reserve. Whereas the collective term for the taxing and spending actions of governments is known as fiscal policy. In the United States, national fiscal policy is determined by the Executive and Legislative Branches. Central banks have used monetary policy to either stimulate an economy into faster growth or slow down growth over fears of issues like inflation, deflation, hyperinflation etc. The theory is that, by incentivizing individuals and businesses to borrow and spend, monetary policy will cause the economy to grow faster than normal. Conversely, by restricting spending and incentivizing savings, the economy will grow less quickly than normal. Fiscal Policy Fiscal policy tools are hotly debated among economists and political observers. Generally ,in an economy the aim of most government fiscal policies is to target the total level of spending, the total composition of spending. The two most widely used means of affecting fiscal policy are changes in the role of government spending or in tax policy. 1) Fiscal policy refers to the
- a) government’s ability to regulate the functioning of financial markets.
- b) spending and taxing policies used by the government to influence the level of economy activity.
- c) techniques used by firms to reduce its tax liability.
- d) the policy by MAS to affect the cash rate