Fiscal policy means the use of budgets and related legislative measures to try to influence the direction of the economy. The quickness with which it can be used. Otherwise, consequences may harm the economy. The Board of Governors of the Federal Reserve is appointed by the President and confirmed by the Senate to serve 14-year terms. Also, the banks would operate based on hard facts and data, rather than the wants and needs of certain individuals. 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. 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. 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 advantages of monetary policy over fiscal policy is that: a. The Board of Governors can make quick decisions. Central banks can use the monetary policy to weaken the overall currency value on the global stage. Pros and Cons of Fiscal Policy. And when decisions are made, action is immediate. Monetary policy does not add to the debt. B) monetary policy does not produce inflation, whereas fiscal policy does. What is one of the advantages of monetary policy over fiscal policy. 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.”. During elections, the controversial issue of monetary policy is ironically avoided by hopeful candidates, who would talk about other matters except for this subject. Whether the money is wisely spent is another matter, but as the country continues to borrow, the debt continues to grow. While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to fiscal policy. It allows for the imposition of quantitative easing by the Central Bank. Why, it would seem that this topic has its own set of complicated and vague perks and setbacks, with the importance for people to understand what it really is and what its implications in our daily lives. Similarly, subsidizing merit goods or public goods will increase the consumption. 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. 2. One of the major tools of fiscal policy is the government's ability to borrow money. 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. Monetary policy refers to the actions taken by a country's central bank to achieve its macroeconomic policy objectives. 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. 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. It does not guarantee economy recovery. Through the right mix of European fiscal and monetary policy, we can build a better functioning Monetary Union that achieves both of these goals. 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. “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. The limits to fiscal policy are difficulty of changing spending levels, predicting the future. 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. 4. Workers would then lose their jobs. It can lead to lower rates of mortgage payments. Fiscal policy inevitably involves borrowing money. A primary advantage is the speed with which changes can be implemented. Because well… coupla reasons… 1. 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. 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. When a stimulus is necessary to keep growth happening, then banks can lower their interest rates on lending products to encourage additional spending. 1. This also means lower interest rates and, eventually, more money for financial institutions to lend its borrowers. Monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect b. 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. Explain the difference between monetary and fiscal policy. It involves changing the allocations and levels of government expenditures and taxes. Advantages of using fiscal policy is that it can significantly impact the national income and therefore have immediate effect on the economy. According to the National Bureau of Economic Research, it began in December 2007, and the country was only able to enact the … Its ability to cut interest rates is not a guarantee. When monetary policy is general in nature and impersonal in impact, the fiscal policy, in contrast, is selective. 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). A good demonstration of implementation delays is illustrated by the Great Recession. If there is a delay in the implementation of the fiscal policy, it might reduce the effectiveness of the policy… Chapter 17 - Interest Rates and Monetary Policy 115. 5. Elected federal officials are all accountable to the public. Since they were placed in office by the electorate, they must be responsive to the voters if they are to keep their jobs. Monetary policy tools like interest rate can spread the effect all over the nation. As a result, businesses would gain more profit while consumers can afford basic commodities, services and even property. 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. A fiscal policy is the measures that a government takes so as to stabilize its economy. So, decisions should be taken wisely. When the Fed wishes to raise interest rates and slow the economy it can do so without impacting the debt. 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. This situation is a problem of: 117. A country’s economy is controlled by two types of economic measures – fiscal and monetary. Monetary and fiscal policies offer useful tools to influence economic growth, promote full employment and keep inflation in check. Monetary policy in normal times is 3. Monetary policy favours the 1% 4. Advantages and disadvantages both are needed. The rationale for the long terms is that the Governors should be insulated from political pressure. With this policy, interest rates can still increase, making businesses not willing to expand their operations, resulting to less production and eventually higher prices. Monetary policy is designed to be different. The fiscal policy ensures that the economy develops and grows through the government’s revenue collections and government’s appropriate expenditure. There are several advantages and disadvan­tages in using monetary policy as a tool for correcting the problems of inflation and un­employment. They encourage higher levels of economic activity. Planning for the spending is done once by most of the governments. Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. Monetary policy and fiscal policy are not equally good as ways to stimulate the economy. It can boost the export levels for the national economy. 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 They have the expertise and the security to do what is best for the country even if it is not politically popular. (The question is specifically about the advantages of monetary policy compared fiscal policy in a recession). One of the drawbacks of fiscal policy is the time elapsed between the recognition of the need for action until it actually happens. Both fiscal and monetary policy can be either expansionary or contractionary. 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. 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 Expansionary fiscal policy refers to reducing taxes and increasing government spending to stimulate the economy. 5. 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 3. 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." 1. If this is the case, export losses would be more than what commercial organizations could earn from their sales. Interest rates are controlled to promote overall economic growth. 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. Some central banks are tasked with … Its relative isolation from political pressure. 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. In addition, taxes on negative externalities decreases consumption of negative externalities or demerit goods. Its fine if you can only do one aspect of the policies ( like either advantage or disadvantage ). Their autonomy gives them freedom not granted to elected officials. 5. Based on the ones listed above, what do you think? Even the Federal Reserve can operate without being exposed to political influences. Monetary and fiscal policies offer useful tools to influence economic growth, promote full employment and keep inflation in check. Your country’s importer companies will face the real threat. When a fiscal policy is being developed, the writers must be aware of the specific areas they intend to target with the legislation. Monetary policy tools encourage consumer activities based on the current status of the economy. 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. Evaluate the advantages and the disadvantages of the current fiscal policy and monetary policy in USA.? It could discourage businesses to expand. To have a well-informed opinion on this subject, let us take a look at its advantages and disadvantages. 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. Needs of certain individuals would gain more profit while consumers can afford commodities... Policy ensures that the Governors should be insulated from political pressure operate based on facts! 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