Analysis of fiscal and monetary policy in maximizing growth and

minimizing employment

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fiscal and monetary policy 1

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Contents
Abstract.......................................................................................................................................................2
Introduction.................................................................................................................................................3
Fiscal and monitory policies of Government...........................................................................................3
Unemployment and inflation...................................................................................................................4
Dealing with Problem..............................................................................................................................5
Conclusion...................................................................................................................................................7
References...................................................................................................................................................8

fiscal and monetary policy 2

Abstract
Since the Great Depression and World Wars, economic growth has swapped to the high

unemployment rate and increased inflation. Over time, many theories and policies undergo to

break the struggle between unemployment and the inflation rate. This paper studies the analysis

of fiscal and monetary policies to prevent unemployment and pretensions. It has some reflection

of Keynesian theory along with discussing some critical tools of Federal Reserves.

Keywords: Fiscal Policy, Monetary policy, unemployment, inflation, Keynesians’ theory,

Federal Reserves.

fiscal and monetary policy 3

Introduction
This paper focuses the impressions of Fiscal and Monetary policies to elevate the growth

and employment rate of a country. Fiscal and monetary policies are the macroeconomic tools

that help stimulate the recovery of a nation's economic growth. The fiscal policy inspects

taxation and aggregate demand or spending; the government constitution's department often

leads it. On the other hand, monetary policy's prime concern is to govern interest rates and

monetary flows usually managed by the nation's Central Bank. Both of these policies have the

power in accelerating the country's unemployment and inflation rates (Hakimov¸2020).

Fiscal and monitory policies of Government

Before the World Wars and Great depression: both of these calamities lasted till 1945.

Before this period, every country's economic facet depends on the French economic phrase

Laissez faire1. However, the aftermath of these calamities triggers the economist, and it occurs
fiscal and monetary policy 4
in them to work proactively to reduce the risk of increased unemployment and inflation.

Gradually, the theory of economics evolves, and various policies come into contact, i.e. fiscal

policy and monetary policy. The amalgamation of both these policies helps reduce the inflation

and unemployment rate of the country's economy (Bonam, D., & Lukkezen¸2019).

Both of these policies have an indirect or direct relation in stimulating a country’s

economy. Fiscal policy has the power to decide on an individual’s taxation and spending and

somehow provide employment in the government sector. Monetary policy helps to reduce

interest rates. It creates the possibility to low down prices from plastic money to brick and mortar

systems.

Cavalcanti, M. A., Vereda, L., Doctors (2018) says that Fiscal policy focuses the theory of

British economist John Maynard Keynes, known as the Keynesians economics. This theory

explains that macroeconomics can be better by increasing or decreasing tax rates, spending in

prolific practices may influence productivity levels. This policy plays an essential role in

maintaining the employment stature of a company. For example: in 2012 many were disturbed

by the fact of fiscal cliff that produces an increase in tax rates. This feud in January 2013, would

send the U.S. economy back into recession. Thus, the U.S. economy circumvents this problem by

passing the American Taxpayer Relief Act of 2012 on January 1, 2013 (Cavalcanti, M. A., Vereda,

L., Doctors, R. D. B., Lima, F. C., & Maynard¸2018).

Unemployment and inflation

Fiscal policy is supplementary to stable the country's unemployment and inflation rate

instead of monetary policy. Its work is only to look for the monetary assets of spending,

borrowing, and taxation rate while checking country's specified economy. Simultaneoulsy, the

monetary policy helps reduce the inflation rate and other cases through Federal Reserves with the
fiscal and monetary policy 5
subject to increase under-employment and inflation.

Karwowski, E., & Centurion-Vicencio (2018) suggest that economic recessions put a

heavy toll on a government's side. However, the government uses various policies to wrestle

with this situation to lower the tax rate and increase the aggregate demand of goods. This

revitalizes businesses and turns the stationer state of the economy to operational. Imagine that a

country's economy gets stagnant. Ultimately, the employment rate decreases; companies are not

progressing. Eventually, the inflation rates go to the sky (Karwowski, E., & Centurion-

Vicencio¸2018).

Suppose the government wants to regain its economy strategically. In that case, it will

decrease the taxation rate while increasing consumers' demand. Still, it improves government
spending in the form of acquisition for grappling with jobs and wages that ensures the

enlargement of a country’s economic growth.

Dealing with Problem

The effects of fiscal policy may impact spending, borrowing, exchange, and even interest

rates associate with the monetary policy. The Keynesian theory argues that government must

take action to steer the country's employment. It makes a comfortable environment for making

money by increasing the aggregate demand: which results in its economic prosperity. Monetary

policy has powers to light and blind the country's economy, usually controlled by the Federal

Reserve. In the concept of early Keynesian theory, they think that monetary policy has no long-

term effects on economic growth (Bassetto, M., & Sargent¸2020). It is because of two reasons;

1. Because banks are not allowed to surplus reserves.

2. Keynesian argues that consumer demand may not relate to the capital demand of equity
fiscal and monetary policy 6
and debt.

Egea, F. B., & PEDRO (2021) evaluate that government uses fiscal policy to promote

sustainable growth and reduce the risk of unemployment and inflation. Monetary policy deals in

the subject to lessen interest rates. Reduced interest rates help decrease the process of borrowing

and motivate people to invest more and more. It provides aids in increasing the aggregate

demand as well as the total GDP rate. This increases the employment rate along with make

exports more competitive. In some cases, Central Bank utilizes Quantitative easing if the

reduction in the tax rate is not improving the aggregate demand. Both of these helps in nurturing

the government's monetary states; they keep an eye on the economic facets in spending,

borrowing, taxation, and composition throughout the government's economy ( Egea, F. B., &

PEDRO, 2021).
Hakimov (2020) says that the country's high employment or low inflation rate depending on the

subsequent use of these two policies. Monetary policies help to double the exchange rate in

limited revenue and illuminate competition in the regulation of exports. Monetary policy has a

strong influence on the equity and fixed income markets. Federal Reserves in Monetary policy

has three powerful instruments:

 Open Market Operation2: it affects the money supply by buying and selling securities to

U.S government securities. 

 Reserve requirements3: federal reserves can alter the account by directly increasing or

decreasing the money supply.

 Discount Rate4: it is the essential tool that can create a massive potential in economic

growth (Hakimov¸2020).

fiscal and monetary policy 7

Conclusion
To conclude, Fiscal policy examines the government's spending and corporation tax; on

the other hand, monetary policy investigates the money supply of an economy with particular

emphasis on interest rates. These are the critical tool to prevent inflation and unemployment.

Both approaches are of the predominant qualities in stabilizing the economic growth with the

low unemployment rate or low inflation census. fiscal and monetary policy 8

There is no way to foretell which strategy works in what way. Besides the relation of

demand and tax rate, many other factors contribute to the unemployment rate, such as natural

calamities, wars, and other large-scale disasters that can move markets. If both of these policies

implement strategically and accurately, it creates a crucial impact on your economic growth that

sequentially reduces the risk of unemployment and inflation.

References
Hakimov, H. (2020). Issues of optimic basis of public financing in following financial and monetary

policy. Архив научных исследований, 1(4).

Bonam, D., & Lukkezen, J. (2019). Fiscal and monetary policy coordination, macroeconomic stability, and

sovereign risk premia. Journal of Money, Credit and Banking, 51(2-3), 581-616.

Cavalcanti, M. A., Vereda, L., Doctors, R. D. B., Lima, F. C., & Maynard, L. (2018). The macroeconomic

effects of monetary policy shocks under fiscal rules constrained by public debt

sustainability. Economic Modelling, 71, 184-201.

Karwowski, E., & Centurion-Vicencio, M. (2018). Financialising the state: recent developments in fiscal

and monetary policy. fiscal and monetary policy 9

Bassetto, M., & Sargent, T. J. (2020). Shotgun wedding: Fiscal and monetary policy. Annual Review of

Economics, 12, 659-690.

Egea, F. B., & PEDRO, D. R. L. (2021). Monetary policy strategy and inflation in Japan. There is a

Spanish version of this edition with the same number.