Monetary Policy (Essay/Paper Sample)

Monetary & Fiscal Policy

The purpose of both monetary and fiscal policies is to create a more stable economy, characterized by positive economic growth and low inflation. In the case of the recession of the Macro-Poland, both the fiscal and monetary policy are better placed to reduce the economic fluctuations such as the sluggish consumption and investment, low rates of unemployment, and inflation. The fiscal policy refers to the impact of the government tax spending on the economy and aggregate demand. There exists two categories of fiscal policy, and these are the deflationary and the expansionary fiscal policies. The deflation fiscal policy presupposes reducing the aggregate demand which involves higher taxation and lower spending. The main impact of the deflation fiscal policy is to reduce a budget deficit. On the other hand, expansionary fiscal policy is aimed at increasing the aggregate demand and involves lower taxation and higher government spending. The main impact of the expansionary fiscal policy is that it leads to a bigger budget deficit.

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The monetary policy regards the influence of the demand and supply for money over the interest rates as well as other tools of monetary policy. The aim of the monetary policy is to achieve a low inflation. Macro-Poland is presently going through a recession, the investment and consumption are very sluggish with unemployment being quite high at nine percent. To check on these aspects of recession, I would employ the three tools of monetary policy. These include the reserve requirements, the discount rate, and the open market operations. To stimulate the policy towards growth, I would use the two primary tools of fiscal policy which are spending and taxation. The cause of action will be applying the expansionary monetary policy by raising the transfer payments, lowering taxes, and increasing the government spending. The primary impact of the three monetary policy tools and the two expansionary fiscal policy tools will be the rise in economic growth and consequently recovering from the recession, and the control of the rate of inflation as well. Growth in economy will result in the availability of employment, hence eradicating the problem of unemployment. The expansionary policy will expand the money supply and thus will be encouraging the economic growth. On the other hand, the monetary policy tools ill combat the inflation through the price increases.

Lowering the discount rates will encourage compliments for the open market operations by influencing other interest rates. These encourage spending and lending by businesses and consumers, hence contributing to the economic growth. Similarly, I would decrease the reserve requirements. In this way, the banks will have more money to lend to businesses and consumers and consequently increase in growth rate of the economy. Lastly, the open markets, where there will be buying and selling of the Macro-Poland government securities, will check on the inflation. These tools of monetary and fiscal policy will ensure that the government of Macro-Poland will bring back to its feet the economic growth that it normally enjoyed before the recession and after it as well. Additionally, unemployment rates will go down due to the increase in economic growth and therefore investments and business will offer more places or rather lots for the unemployed.


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