Monetary policy and fiscal policy refer to the two most widely recognized “tools” used to influence a nation’s economic activity. These are important terms in Economy and IAS aspirants must develop a clear understanding of them. It is part of the General Studies Paper III in the UPSC syllabus.
Monetary policy chiefly 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 Reserve Bank of India (RBI).
The collective term for the taxing and spending actions of governments is known as fiscal policy.
Central banks have used monetary policy to either prod an economy into faster growth or slow down growth over fears of issues like inflation, deflation, hyperinflation etc. The idea is that, by encouraging individuals and businesses to spend and borrow, monetary policy will cause the economy to grow speedier than normal. In contrast, by limiting 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 objective of most government fiscal policies is to manipulate the overall 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
- government’s ability to regulate the functioning of financial markets.
- spending and taxing policies used by the government to influence the level of economic activity.
- techniques used by firms to reduce its tax liability.
- the policy by MAS to affect the cash rate