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    Fiscal and Monetary Policy

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    Looking for clarification between monetary and fiscal policies. I'm thinking fiscal policies are good if government wants to decrease its spending, but then when I study up on monetary policies it appears that monetary is better.

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    Fiscal policy refers to nation's policy relating to the government spending, taxing, borrowing and debt management. The main objectives of the fiscal policy are:
    1. Mobilization of resources
    2. Acceleration of the economic growth
    3. To minimize the inequalities of Income and Wealth.

    There are three main constituents of the fiscal policy, these are:
    1. Taxation policy
    2. Public Expenditure policy
    3. Public debt policy

    All these constituents must work together to make the fiscal policy sound and effective.

    The main objectives for which taxes are levied is to raise revenue by transferring resources from the public to government and the opposite applies when the government cut the taxes so that some resources are transferred from the government to public. It will depend on the tax system that how much it has impact on the economy. The characteristics of good tax system are:
    Equity in distribution of tax burden
    1. It should yield a satisfactory amount for the maintenance of a government.
    2. It should maximize social benefit that is redistribution of wealth and reducing the inequalities of income.

    Therefore in the situation of recession the tax credit and tax cuts will increase the disposable income and hence increase the overall production of the economy, and in the reverse situation, there can be increase in taxes.

    Public Expenditure
    It is the most potent weapon to raise the consumption and to increase the economic growth. Increased government expenditure will open new job opportunities in the economy, which means creation of demand for goods and services. It can lead to pump priming, which means increase in private expenditure through an injection of fresh purchasing power in the form of an increase in public expenditure. Such expenditure should be progressively raised in the depression and cut during the times when economy is growing too quickly.

    Public Debt policy
    The government for this purpose can reduce the public borrowing so that there is more resources with the public to increase the ...

    Solution Summary

    This solution explains the impact of monetary and fiscal policy on government spending.