MACROECONOMICS

MONETARY POLICY VS FISCAL POLICY

KUSHAL VYAS
15131086
 Monetary policy

Monetary policy is the process by which monetary

authority of a country, generally a central bank
controls the supply of money in the economy by
its control over interest rates in order to maintain
price stability and achieve high economic
growth. In India, the central monetary authority is
the Reserve Bank of India (RBI). It is so designed as
to maintain the price stability in the economy
HOW MONETARY POLICY WORKS

 The Central Bank may have an inflation

target of 2%. If they feel inflation is going to
go above the inflation target, due to
economic growth being too quick, then they
will increase interest rates.
 Higher interest rates increase borrowing costs
and reduce consumer spending and
investment, leading to lower aggregate
demand and lower inflation.
 If the economy went into recession, the
Central Bank would cut interest rates.
 Fiscal policy

In economics, fiscal policy is the use of

government revenue collection (mainly taxes)
and expenditure(spending) to influence the
economy. According to Keynesian economics,
when the government changes the levels of
taxation and governments spending, it
influences aggregate demand and the level of
economic activity. Fiscal policy can be used to
stabilize the economy over the course of
the business cycle.
 HOW FISCAL POLICY WORKS

High rate of Inflation

 Government will try to influence aggregate demand by
reducing its public spending. The government will spend less on
construction of roads, bridges and other public spending and
thus aggregate demand will fall. On the other hand,
Government may increase the tax rates. An increase in tax
rates will take away the extra disposable income out people’s
pocket resulting in a lower demand

Low rate of Inflation

 In an economic recession, aggregate demand, output and
employment all tend to fall. Now the Government wants to
increase employment in the economy, it can attempt to do so
by increasing aggregate demand. The Government will
increase the public spending resulting in a rise in aggregate
demand. Government may reduce the tax rates so that people
have more disposable income to spend and instigate demand
in the economy.
Basis of Fiscal policy Monetary policy
comparison
Meaning The tool used by the The tool used by the
government in which it central bank to regulate
uses its tax revenue and the money supply in the
expenditure policies to economy is known as
affect the economy is Monetary Policy.
known as Fiscal Policy.
Administered by Ministry of Finance Central bank

Nature The fiscal policy changes Depends on the

every year. economic status of the
nation.
Related to Government Revenue & Banks & Credit Control
Expenditure

Focuses on Economic Growth Economic Stability

Policy instruments Tax rates and Interest rates and credit

government spending ratios