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Capstone Essay: The Practical Economy

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Fiscal policy can be defined as the policy used by the government through controlling the
taxation and spending of government in order to change the economics conditions mainly
involving the macroeconomics along with effecting the aggregate demand of inflation, goods,
employment, services and economic growth.

The advantages of fiscal policy includes the budget deficit reduction, unemployment
reduction and increase in economic growth. As the fiscal policy deals with the control of
government spending and taxes through which the economy can implement expansionary fiscal
policy in order to control unemployment. Similarly when the revenue increase expenditures it
causes a deficit in budget and through fiscal policy the economy can control the deficit and
surplus. With fiscal policy the macro level stability in terms of economic growth can be
stimulated by the government through expansion of national economy. The weaknesses of fiscal
policy mainly includes inflexibility as this policy require legislative support and takes time for
implementation.

Monetary policy is the macroeconomic policy that is implemented by central in lieu of

controlling interest rates, money supply and on the demand sided to control inflation, liquidity,
growth and consumption according to the economic needs. One of the strengths of monetary
policy is its ability to maintain a stability in prices. This involves the countering of inflation
through the interest rate increase causing people to spend less countering increasing prices.
Additionally, the flexibility monetary holds is much more than the fiscal policy as it is
implemented by central bank so it can shape it objectives easily as compared to the fiscal policy.
However, the monetary policy holds a weakness of contradicting the economic growth with
inflation as inflation controlling measure tend to effect the growth inversely.

In order to counter the inflation and national debt at the same time the best available
option would be to implement the tight fiscal policy. Tight fiscal policy will mainly involve in
controlling the government spending and increase tax revenues in lieu of reducing the aggregate
demand which in result will tend to reduce the inflation. Moreover, with reduced government
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spending overall in the economy along with increased tax revenues will tend to reduce the
budget deficit which in return will provide more funds to cover the national debt. The strength of
this policy is that it will tend to solve both the inflation and national debt issue at hand at an
effective level by reducing the inflationary pressure caused by reduced aggregate demand.
However, its limitations includes the high political cost due to increase in taxes. The tight fiscal
policy is tended to be used as the basis of implementation of strategies in order to counter the
inflation of 5-6% and national debt being all time high. The tight fiscal policy will tend to reduce
the government spending and increased taxes discouraging people to spend more causing a
declining trend to inflation along with providing the government with enough resources and
income to fulfill the requirements of all time high national debt.