In the world of economics, there are many policies which help in the running of the daily activities of a financial firm. With these policies, there is assurance that the firm will not only be successful in making profits but will also remain active all through the day and achieve its goals. This discussion explains and explores the differences between the policies, monetary policy and fiscal policy and how they affect the financial firm in the world of economics.
In both monetary and fiscal policy there can be either contractionary or expansionary policy tools. Both tools play different functions. For instance, policy tools whose measures aim at the increment of the economic growth and the GDP are known as expansionary. On the other hand, measures which aim at reining in any economy that is overheated mostly when the inflation high is known as the contractionary measures.
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Fiscal policy
Fiscal policy refers to the influencing of the taxation levels by the government and the way it (government) spends so that it can influence the economic activity level and Aggregate Demand (AD). Aggregate Demand refers to the overall extent of the spending planned in the economy (Perry, Serven, & Suescun, 2008).
Tools of implementing fiscal policy and the goals intended of tools
Fiscal policy is controlled and implemented by the Governments’ executive and legislative branches. In U.S. the Congress and the administration of the President (Treasury Secretary) are responsible for passing these laws (Perry, Serven, & Suescun, 2008). Fiscal tools are used by the policy-makers when manipulating the economy’s demand. For instance, spending where inflation rates are high, the administration can choose to reduce its expenditures thus withdrawing from the competitive resources within the market. This approach falls under the contractionary policy where prices get reduced. Conversely, if there is a flagging in the aggregate demand and a recession is evident, increased spending by the government on projects like infrastructure would most definitely result in high employment opportunities and demand. Another thing is taxes, when there is weak demand, the taxes can be reduced by the government. As a result, the disposable income increases, thus stimulating the demand. All these tools have an impact on the governments’ fiscal position; that is a deficit of the budget goes up even if the government lowers taxes or increases the spending of the economy (Bléjer & Škreb, 2012).
Monetary Policy
Monetary policy entails the actions undertaken by the central bank like Federal Reserve which influences the cost and availability of money. It also influences credit as one way of assisting in the promotion of the national economic targets. Federal Reserve implements this policy with the help of three primary tools (Monetary Policy, n.d.). Monetary policy is geared towards the promotion of prices stability, moderating long-term interests, and maximum rates of employment.
Tools use by monetary policy and the intended goals of using this policy
Monetary tools comprise of the interest rates, which are primarily borrowing costs. Through the manipulation of the rates of interests, the central banks may choose to make it harder or easier to borrow cash. There are many economic activities and increased borrowing when the price of money is low (Bléjer & Škreb, 2012). For instance, businesses find it viable to borrow when the interest rates are below 5%. In addition, lower rates discourage savings thus people to spend a lot since the returns gained from savings are very less. Another tool is currency peg; where an economy that is weak may choose to peg its currency against a much mightier currency (Bléjer & Škreb, 2012). The approach is mostly employed when various other means, in the case of a runaway inflation, fail to work. Other tools include open market operations and reserve requirements.
Fiscal policy in most cases is associated with the government expenditure and revenue, while, on the other hand, monetary policy concentrates on the financial and borrowing arrangement. The two policies differ completely from each other the main problem of the fiscal policy is that it can be easily influenced by the political affairs (Surbhi, 2015). Therefore, this makes it unsafe. On the other hand, monetary has an implementation lag, where policy makers take long before dealing with a problem which can be a threat to the financial institution or economy. Both policies are essential for the wellbeing of a bank or any other financial institution simply because as much as they are entirely different from each other they are dependent on each other as well.
References
Bléjer, M. I., & Škreb, M. (2012). Central Banking, Monetary Policies, and the Implications for Transition Economies . Boston, MA: Springer US.
Monetary Policy. (n.d.) From Federal Reserve Bank of Richmond website. Retrieved from https://www.richmondfed.org/faqs/monetary_policy
Perry, G., Serven, L., & Suescun, R. (2008). Fiscal policy, stabilization, and growth: Prudence or abstinence? . Washington, D.C: World Bank.
Surbhi, S. (2015). Key differences. Difference Between Fiscal Policy and Monetary Policy. http://keydifferences.com/difference-between-fiscal-policy-and-monetary-policy.html
