Even the Federal Reserve can operate without being exposed to political influences. 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 It can boost the export levels for the national economy. It would also mean that consumers will be able to settle their monthly payments regularly—a win-win situation for creditors, merchandisers and property investors as well! The rationale for the long terms is that the Governors should be insulated from political pressure. Policy measures taken to increase GDP and economic growth are called expansionary. As a result, businesses would gain more profit while consumers can afford basic commodities, services and even property. Monetary policy does not add to the debt. There are several advantages and disadvan­tages in using monetary policy as a tool for correcting the problems of inflation and un­employment. 1. If there is a delay in the implementation of the fiscal policy, it might reduce the effectiveness of the policy… 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. Based on the ones listed above, what do you think? While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to fiscal policy. Below the fiscal policy advantages and disadvantages have discussed respectively. Otherwise, consequences may harm the economy. It can lead to lower rates of mortgage payments. They have the expertise and the security to do what is best for the country even if it is not politically popular. 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. Monetary policy favours the 1% 4. 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. 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. 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. Your country’s importer companies will face the real threat. 1) Monetary policy means that policy implemented by the fed to increase or decrease money supply in an economy where as fiscal policy has been implemented by the government. Planning for the spending is done once by most of the governments. The former permits the market mechanism to operate smoothly. Monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect b. During elections, the controversial issue of monetary policy is ironically avoided by hopeful candidates, who would talk about other matters except for this subject. They encourage higher levels of economic activity. While there will always be a lag in its effects, fiscal policy seems to have a greater effect over long periods of time and monetary policy has proven to have some short-term success. 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 While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to 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.”. 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. The increased demand from the government for borrowed funds can potentially raise interest rates and crowd out others who do not wish to pay the higher rates. Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. Basically, the agency decides how much interest rates would be imposed on banks in terms of borrowing, where banks would also be the ones to determine how high these rates will they be asking from the borrowers. 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. 5. Disadvantage: Time Lag. One of the advantages of monetary policy over fiscal policy is that: a. The Board of Governors can make quick decisions. Monetary policy tools like interest rate can spread the effect all over the nation. Its ability to cut interest rates is not a guarantee. Answer: Monetary Policy: It helps to limit the flow of money in order to reduce problems of unemployment, inflation and to stabilize business cycle. What is one of the advantages of monetary policy over fiscal policy. Fiscal Policy vs. Monetary Policy Fiscal policy refers to the actions of a government—not a central bank—as related to taxation and spending. 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. The Federal Open Market Committee, a major policy-making part of the Fed, can, too. Even then time is required for the desired effect to take place. Inflexibility - There are usually delays in the implementation of fiscal policy, because some proposed measures may have to go through legislative processes. Thomas Metcalf has worked as an economist, stockbroker and technology salesman. It can bring out the possibility of more investments coming in and consumers spending more. Some central banks are tasked with … Consequently, fiscal policy has an element of political expediency. Some advantages of using the fiscal policy are: They are specific and can stimulate specific growth. 5. 3. One of the drawbacks of fiscal policy is the time elapsed between the recognition of the need for action until it actually happens. Monetary policy and fiscal policy are not equally good as ways to stimulate the economy. Central banks can use the monetary policy to weaken the overall currency value on the global stage. 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. Expansionary fiscal policy refers to reducing taxes and increasing government spending to stimulate the economy. 4. This situation is a problem of: 117. Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. Pros and Cons of Fiscal Policy. During sluggish economic times, the government cuts taxes and this leaves taxpayers with additional cash for spending, which increases consumption levels. The strengths of monetary policy compared to fiscal policy are generally thought to include all of the following except greater: 116. The limits to fiscal policy are difficulty of changing spending levels, predicting the future. 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