MONETARY POLICY Monetary policy refers to the use of instruments under the control of the central bank (RBI) to regulate the availability, cost and use of money and credit. Since the central bank can operate separately from the government, this will allow them to make the best decisions based upon how the economy is performing doing at a certain point in time. It can lead to lower rates of mortgage payments. Chapter 17 - Interest Rates and Monetary Policy 115. Monetary policy refers to the actions taken by a country's central bank to achieve its macroeconomic policy objectives. While consumers would not be able to afford goods and services, it would take a long time for businesses to recover and even cause them to close up shop. It does not guarantee economy recovery. When a fiscal policy is being developed, the writers must be aware of the specific areas they intend to target with the legislation. A monetary policy would oblige policymakers to make announcements that are believable to consumers and business owners in terms of the type of policy to be expected in the future. A primary advantage is the speed with which changes can be implemented. Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. Monetary policy does not add to the debt. Based on the ones listed above, what do you think? Fiscal policy is the deliberate alteration of government spending or taxation to help achieve desirable macro-economic objectives by changing the level and composition of aggregate demand(AD). Thomas Metcalf has worked as an economist, stockbroker and technology salesman. During elections, the controversial issue of monetary policy is ironically avoided by hopeful candidates, who would talk about other matters except for this subject. It promotes political freedom. It can take time to be implemented. In addition, taxes on negative externalities decreases consumption of negative externalities or demerit goods. They encourage higher levels of economic activity. Its fine if you can only do one aspect of the policies ( like either advantage or disadvantage ). The nature of fiscal policy is that it is very specific in its targets. Consequently, fiscal policy has an element of political expediency. Basically, the agency decides how much interest rates would be imposed on banks in terms of borrowing, where banks would also be the ones to determine how high these rates will they be asking from the borrowers. Proponents of expansionary monetary policy state that even if banks lower interest rates for consumers to spend more money during a global recession, the export sector would suffer. 1. Monetary policy can be implemented quickly. 1. 5. Monetary policy is used in to help keep economic growth and stability, but there is no guarantee that it would always help society, considering that it also has its own set if drawbacks. “take away the punch bowl just when the party gets going.”, Confessions of a Supply-Side Liberal: Monetary vs. Fiscal Policy: Expansionary Monetary Policy Does Not Raise the Budget Deficit, Economics Help: Difference Between Monetary and Fiscal Policy. 4. One of the advantages of monetary policy over fiscal policy is that A) monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect. Though a monetary policy is said to allow banks to enjoy lower interest rates from the Central Bank when they borrow money, some of them might have the funds, which means that there would be insufficient funds that people can borrow from them. Monetary policy favours the 1% 4. Below the fiscal policy advantages and disadvantages have discussed respectively. Monetary policy tools encourage consumer activities based on the current status of the economy. Advantages and disadvantages both are needed. In the US, the Federal Reserve System is the agency executing monetary policy, which can either be contractionary or expansionary, with the former aiming to slow down the supply and even limit it to prevent the devaluation of assets and slow down inflation and the latter increasing the supply of money by lowering loan interest rates to encourage businesses to expand and cut down unemployment rates during recession. It would also mean that consumers will be able to settle their monthly payments regularly—a win-win situation for creditors, merchandisers and property investors as well! Explain the difference between monetary and fiscal policy. This also means lower interest rates and, eventually, more money for financial institutions to lend its borrowers. One of the biggest perks of monetary policy is that it can help promote stable prices, which are very helpful in ensuring inflation rates will stay low throughout the country and even the world. Their autonomy gives them freedom not granted to elected officials. 1. With things expected to be done immediately in these modern times, implementing a monetary can certainly take time, unlike other types of policies, such as a fiscal policy, that can help push more money into the economy faster. Advantages of Mone view the full answer 1. Fiscal policy means the use of budgets and related legislative measures to try to influence the direction of the economy. A good demonstration of implementation delays is illustrated by the Great Recession. And when decisions are made, action is immediate. It promotes transparency and predictability. To have a well-informed opinion on this subject, let us take a look at its advantages and disadvantages. send our content editing team a message here, 22 Advantages and Disadvantages of Monarchy, 21 Advantages and Disadvantages of Nuclear Energy, 100 Most Asked Mechanical Engineer Interview Questions with Answers, 40 Most Asked Security Guard Interview Questions with Answers, 30 Impressive Sales Manager Resume Objective Statement Examples, 33 Impressive Office Assistant Resume Objective Statement Examples, The 100 Most Asked Salesforce Admin Interview Questions with Answers, The 50 Most Asked Library Assistant Interview Questions with Answers, 125 Thinking of You Text Messages for Him and Her, 40 Ways to Say Thank You for Your Time and Effort, 40 Kind Ways to Say Thank You for Your Advice, The 50 Most Asked School Counselor Interview Questions with Answers. It can bring out the possibility of more investments coming in and consumers spending more. A monetary policy is a process undertaken by the government, central bank or currency board to control the availability and supply of money, as well as the amount of bank reserves and loan interest rates. The rationale for the long terms is that the Governors should be insulated from political pressure. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. It can promote low inflation rates. It can boost the export levels for the national economy. Advantages and disadvantages of government using fiscal or monetary .. The limits to fiscal policy are difficulty of changing spending levels, predicting the future. When monetary policy is general in nature and impersonal in impact, the fiscal policy, in contrast, is selective. Inflexibility - There are usually delays in the implementation of fiscal policy, because some proposed measures may have to go through legislative processes. Otherwise, consequences may harm the economy. A fiscal policy is the measures that a government takes so as to stabilize its economy. List of the Advantages of Monetary Policy Tools. 1) Monetary policy means that policy implemented by the fed to increase or decrease money supply in an economy where as fiscal policy has been implemented by the government. One of the major tools of fiscal policy is the government's ability to borrow money. With this policy, interest rates can still increase, making businesses not willing to expand their operations, resulting to less production and eventually higher prices. Its relative isolation from political pressure. 3. 2. Monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect b. Measures taken to rein in an \"overheated\" economy (usually when inflation is too high) are called contractionary measures. 5. B) monetary policy does not produce inflation, whereas fiscal policy does. Monetary and fiscal policies offer useful tools to influence economic growth, promote full employment and keep inflation in check. A monetary policy is a process undertaken by the government, central bank or currency board to control the availability and supply of money, as well as the amount of bank reserves and loan interest rates. When the Fed wishes to raise interest rates and slow the economy it can do so without impacting the debt. Evaluate the advantages and the disadvantages of the current fiscal policy and monetary policy in USA.? It is not that useful during global recessions. Interest rates are controlled to promote overall economic growth. Through the right mix of European fiscal and monetary policy, we can build a better functioning Monetary Union that achieves both of these goals. Even the Federal Reserve can operate without being exposed to political influences. The increased demand from the government for borrowed funds can potentially raise interest rates and crowd out others who do not wish to pay the higher rates. While the fiscal policy is framed and implemented by the government with regulation of its spending and collection of revenue, the monetary policy is controlled by the central bank of the country (in India, it … 5. Likewise when it wishes to stimulate the economy its actions have no impact on the debt. Fiscal policy is not reactive 2. As monetary policy would lower interest rates, it would also mean lower payments home owners would be required for the mortgage of their houses, leaving homeowners more money to spend on other important things. One of the drawbacks of fiscal policy is the time elapsed between the recognition of the need for action until it actually happens. The Federal Open Market Committee, a major policy-making part of the Fed, can, too. The strengths of monetary policy compared to fiscal policy are generally thought to include all of the following except greater: 116. Elected federal officials are all accountable to the public. Traditional monetary policy (that is, lowering the short-term interest rate) has two key advantages over traditional fiscal policy: It does not add to the national debt Because many governments have–however c Metcalf holds a master's degree in economics from Tufts University. Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. The goals of boosting the euro’s global standing and sharing its advantages more evenly are one and the same, writes Executive Board member Fabio Panetta. Monetary and fiscal policies offer useful tools to influence economic growth, promote full employment and keep inflation in check. Some advantages of using the fiscal policy are: They are specific and can stimulate specific growth. Plus, prices of commodities would also be lowered, so consumers will have more reasons to purchase more goods. Planning for the spending is done once by most of the governments. The former permits the market mechanism to operate smoothly. An advantage monetary policy has over fiscal policy is that monetary policy: a. can be quickly changed and implemented b. is coordinated with fiscal policy c. is approved by the President of the United States d. affects consumption expenditure and investment without impacting international trade (The question is specifically about the advantages of monetary policy compared fiscal policy in a recession). In an expansionary monetary policy, where banks are lowering interest rates on loans and mortgages, more business owners would be encouraged to expand their ventures, as they would have more available funds to borrow with affordable interest rates. Pros and Cons of Fiscal Policy. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Monetary policy in normal times is 3. What is one of the advantages of monetary policy over fiscal policy. This situation is a problem of: 117. The Board of Governors of the Federal Reserve is appointed by the President and confirmed by the Senate to serve 14-year terms. Both fiscal and monetary policy can be either expansionary or contractionary. Fiscal Policy vs. Monetary Policy Fiscal policy refers to the actions of a government—not a central bank—as related to taxation and spending. Monetary policy tools like interest rate can spread the effect all over the nation. While there will always be a lag in its effects, fiscal policy seems to have a greater effect over long periods of time and monetary policy has proven to have some short-term success. So, decisions should be taken wisely. Similarly, subsidizing merit goods or public goods will increase the consumption. A country’s economy is controlled by two types of economic measures – fiscal and monetary. Advantages of Fiscal Policy• Can have a significant impact on the Economy• Can be discriminating which allows different regions or consumption habits to prosper• Makes the distribution of income fairer through progressive taxes and benefits 13. Even then time is required for the desired effect to take place. Monetary policy is designed to be different. currency board or the government to control the availability of money and its supply as well as the interest rates on loans and the amount of bank reserves It involves changing the allocations and levels of government expenditures and taxes. Economists who criticize the Federal Reserve on imposing monetary policy argue that, during recessions, not all consumers would have the confidence to spend and take advantage of low interest rates, making it a disadvantage. Workers would then lose their jobs. 2. Since they were placed in office by the electorate, they must be responsive to the voters if they are to keep their jobs. If there is a delay in the implementation of the fiscal policy, it might reduce the effectiveness of the policy… There are several advantages and disadvan­tages in using monetary policy as a tool for correcting the problems of inflation and un­employment. Policy measures taken to increase GDP and economic growth are called expansionary. The need is discovered, Congress debates it, different versions of a bill must be reconciled between the House and Senate, the President must sign the bill into law and then the law -- spending or taxing -- is implemented. 6. Advantages of using fiscal policy is that it can significantly impact the national income and therefore have immediate effect on the economy. One of the advantages of monetary policy over fiscal policy is that: a. Whether the money is wisely spent is another matter, but as the country continues to borrow, the debt continues to grow. Central banks can use the monetary policy to weaken the overall currency value on the global stage. 1. It could discourage businesses to expand. If this is the case, export losses would be more than what commercial organizations could earn from their sales. According to experts, changes that are made for a monetary policy might take years before they begin to take place and make changes felt, especially when it comes to inflation. Answer: Monetary Policy: It helps to limit the flow of money in order to reduce problems of unemployment, inflation and to stabilize business cycle. Because well… coupla reasons… 1. According to the National Bureau of Economic Research, it began in December 2007, and the country was only able to enact the … As inflation essentially makes an impact on the way we spend money and how much money is worth, a low inflation rate would allow us to make the best financial decisions in life without worrying about prices to drastically rise unexpectedly. What is the major advantage of monetary policy over fiscal policy Offered Price: $ 2.00 Posted By: solutionshere Posted on: 03/21/2016 06:06 PM Due on: 04/20/2016 As a result, businesses would gain more profit while consumers can afford basic commodities, services and even property. The quickness with which it can be used. Its ability to cut interest rates is not a guarantee. Monetary policy and fiscal policy are not equally good as ways to stimulate the economy. It allows for the imposition of quantitative easing by the Central Bank. 4. The Board of Governors can make quick decisions. Also, the banks would operate based on hard facts and data, rather than the wants and needs of certain individuals. Expansionary fiscal policy refers to reducing taxes and increasing government spending to stimulate the economy. 2. When the federal government borrows, it competes with businesses and consumers who also borrow money -- businesses invest in buildings, equipment and property and consumers buy cars, houses and other consumer durables. Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. Your country’s importer companies will face the real threat. While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to fiscal policy. In contrast to fiscal policy, which quickly stimulates additional money into the economy as governments increase spending for government programs and public projects, monetary policy actions take time to work their way through the economy, especially a large modern economy such as that of the U.S. and other world economic powers. Which of the following is considered an advantage of monetary policy compared to fiscal policy. They have the expertise and the security to do what is best for the country even if it is not politically popular. Fiscal policy inevitably involves borrowing money. Disadvantage: Time Lag. The fiscal policy ensures that the economy develops and grows through the government’s revenue collections and government’s appropriate expenditure. William M. Martin, Chairman of the Board during the 1950s and 60s, once commented that his job was to “take away the punch bowl just when the party gets going.”. When a stimulus is necessary to keep growth happening, then banks can lower their interest rates on lending products to encourage additional spending. While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to fiscal policy. The Federal Reserve can make use of a monetary policy to create or print more money, allowing them to purchase government bonds from banks and resulting to increased monetary base and cash reserves in banks. C) the Fed can react more quickly than the legislature can. The goal of monetary policy is to influence the macroeconomy more than to make it possible for specific people to come into power. During sluggish economic times, the government cuts taxes and this leaves taxpayers with additional cash for spending, which increases consumption levels. , eventually, more money for financial institutions to lend its borrowers and can stimulate specific.. 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Federal officials are all accountable to the public Group Media, all Rights Reserved have the expertise the... Tools of fiscal policy ensures that the economy immediate effect on the ones listed above, what do you?! What is best for the country even if it is not politically popular plus, prices of would... Be approved by Congress, which prevents bad monetary policy refers to the actions taken a! Taxation and spending case, export losses would be more than to make it for! Between the recognition of the drawbacks of fiscal policy major policy-making part of the major tools of fiscal policy the. Discussed respectively compared to fiscal policy is that it is very specific in its targets a guarantee country ’ importer. Governors should be insulated from political pressure stabilizing economic activity, monetary policy and policy! Tools encourage consumer activities based on the current status of the economy about... 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