Fiscal Policy

& Monetary
Policy
Fiscal and monetary policies are two key tools that governments and central banks use to
manage and influence their economies. They work together to achieve various economic
goals, such as controlling inflation, promoting economic growth, and maintaining
stability. Here's an overview of each:

FISCAL POLICY :-
Fiscal policy refers to the use of government spending and taxation to influence the
overall health and direction of an economy. It is one of the primary tools that
governments have at their disposal to manage economic conditions and achieve specific
economic goals. Fiscal policy can have a significant impact on various aspects of an
economy, including economic growth, employment, inflation, and income distribution.
TYPES OF FISCAL POLICY

1.Expansionary Fiscal Policy:

Expansionary fiscal policy is used to stimulate economic activity and promote growth,
especially during periods of economic downturns or recessions. The primary objective is
to increase aggregate demand, which can lead to higher levels of employment and
economic output.

2. Contractionary Fiscal Policy:

Contractionary fiscal policy is employed to cool down an overheated economy, control

inflation, or reduce budget deficits during periods of strong economic growth. The primary
objective is to reduce aggregate demand, which can help control inflation and prevent
economic overheating.

.
3.Neutral Fiscal Policy:

A neutral fiscal policy, also known as a balanced fiscal policy or a neutral stance, refers to
a fiscal policy approach where the government's expenditures and tax revenues are
roughly in equilibrium over an economic cycle. In other words, a neutral fiscal policy aims
to neither stimulate nor contract the economy but rather maintain fiscal stability.
MONETARY POLICY:
Monetary policy is the set of actions and tools used by a country's central bank (or a
monetary authority) to control and influence the money supply, interest rates, and overall
financial conditions in an economy. The primary goal of monetary policy is to achieve
specific economic objectives, such as price stability, full employment, and sustainable
economic growth. Central banks implement monetary policy to promote stability and
support the overall health of the economy.
OBJECTIVES OF MONETARY POLICY

1. Price Stability: One of the primary objectives of monetary policy is to maintain price
stability, which means keeping inflation within a target range. Central banks aim to
prevent excessive inflation (rising prices) as well as deflation (falling prices). Price stability
helps preserve the purchasing power of money and promotes economic predictability.

2.Full Employment: Central banks also aim to promote maximum sustainable

employment within their economies. While they don't have direct control over job
creation, their actions can influence economic conditions that affect employment levels.
Low and stable inflation is often seen as conducive to job growth.
3.Economic Growth: While central banks primarily focus on controlling inflation and
maintaining stability, their actions can indirectly impact economic growth. By
influencing interest rates and financial conditions, central banks can encourage
borrowing and investment, which can stimulate economic activity and growth.

4.Exchange Rate Stability: Central banks may also consider exchange rate stability
as an objective, especially in countries with open economies that rely on international
trade. Stable exchange rates can help promote export competitiveness and economic
stability.

5.Financial Stability: Maintaining the stability of the financial system is another

important goal of monetary policy. Central banks monitor and may take actions to
prevent financial crises, such as banking sector collapses or asset bubbles that could
lead to economic instability.
IMPACT OF FISCAL POLICIES

❑ Economic Growth: Fiscal policy can stimulate or restrain economic growth. When the
government increases its spending or reduces taxes, it injects more money into the
economy, which can lead to increased consumer spending and business investment. This,
in turn, can boost economic growth. Conversely, if the government reduces spending or
increases taxes, it can slow down economic growth.

❑ Employment: Fiscal policy can influence the level of employment in an economy.

Expansionary fiscal policies (increased government spending or tax cuts) can lead to higher
employment by stimulating demand for goods and services, which encourages businesses to
hire more workers. Conversely, contractionary fiscal policies (reduced government spending
or tax increases) can lead to lower employment.
❑ Inflation: Fiscal policy can impact inflationary pressures in the economy. When the
government engages in expansionary fiscal policy, there is a risk of increasing inflation if
demand grows too quickly and outpaces supply. Conversely, contractionary fiscal policy can
help cool down an overheating economy and reduce inflationary pressures.

❑ Income Distribution: Fiscal policy can be used to address income inequality. Progressive tax
policies (where higher-income individuals pay a higher percentage of their income in taxes)
and social spending programs can help redistribute wealth and reduce income inequality.

❑ Budget Deficits/Surpluses: Fiscal policy decisions can affect the government's budget
balance. Expansionary policies often lead to budget deficits, as the government spends more
than it collects in revenue. Conversely, contractionary policies can lead to budget surpluses
as the government cuts spending or increases taxes to reduce the deficit.
Impact of monetary policies
❑ Employment: Changes in monetary policy can impact employment. Lower interest rates tend to
stimulate economic activity and may lead to increased hiring, while higher interest rates can have
the opposite effect, potentially reducing employment in certain sectors.

❑ Exchange Rates: Monetary policy can influence exchange rates, which in turn can affect a country's
international trade balance. Lower interest rates can make a country's currency less attractive to
investors, leading to a depreciation of the currency. A weaker currency can make exports more
competitive but also increase the cost of imports.

❑ Financial Markets: Monetary policy has a direct impact on financial markets. Changes in interest
rates can affect stock prices, bond yields, and other financial assets. For example, lower interest
rates often lead to higher stock prices as investors seek better returns in equities.

❑ Consumer and Business Confidence: The stance of monetary policy can influence consumer and
business confidence. When central banks signal that they are taking measures to support economic
growth and stability, it can boost confidence and encourage spending and investment.
THANK YOU

BY,
ANUSHA TP
ANUSHA U
ANUSHKA SINGH
APOORVA M G
ARYA VIJAYAN