A Presentation on

Fiscal and Monetary Policies in line with Macroeconomic and Microeconomic theories

PREPARED BY:
Sunim Thapa (NPI000009)

MBA
Managerial Economics
MB033-3-M
Submitted to
Asia Pacific University
Technology Park, Malaysia
 FISCAL AND MONETARY POLICY IN LINE WITH
MICROECONOMIC AND MACROECONOMIC THEORIES

BY SUNIM THAPA
NPI000009
MICROECONOMICS AND MACROECONOMICS

Microeconomics and macroeconomics are two different perspectives on the economy. The
microeconomic perspective focuses on parts of the economy: individuals, firms, and
industries. Whereas, the macroeconomic perspective looks at the economy as a whole,
focusing on goals like growth in the standard of living, unemployment, and inflation.
Macroeconomics has two types of policies for pursuing these goals: monetary policy and
fiscal policy.
Monetary Policy

Monetary policy, the demand side of economic policy, refers to the

actions undertaken by a nation’s central bank to control money
supply and achieve macroeconomic goals that promote sustainable
economic growth. Monetary policy can be broadly classified as
either expansionary or contractionary.
Monetary policy is designed to influence the behaviour of the
monetary sectors; this is because changes in the behaviour of the
monetary sector influence various monetary variables or
aggregate.
Objectives of monetary policy:
■ Full employment
■ Price stability
■ Economic growth
■ Balance of payment

Instruments of monetary policy:

Central banks use a number of tools to shape and implement monetary policy. 
■ Open market operations
■ Reserve requirement
■ Discount rate
■ Open Market:
First, they all use open market operations. They buy and sell government bonds and
other securities from member banks. This action changes the reserve amount the
banks have on hand. A higher reserve means banks can lend less. That's a
contractionary policy. In the United States, the Fed sells Treasuries to member banks.
■ Reserve Requirement:
The second tool is the reserve requirement, in which the central banks tell their
members how much money they must keep on reserve each night. Not everyone
needs all their money each day, so it is safe for the banks to lend most of it out. That
way, they have enough cash on hand to meet most demands for redemption.
Previously, this reserve requirement has been 10%. However, effective March 26,
2020, the Fed has reduced the reserve requirement to zero.
■ Discount Rate:
The third tool is the discount rate. That's how much a central bank charges members
to borrow funds from its discount window. It raises the discount rate to discourage
banks from borrowing. That action reduces liquidity and slows the economy. By
lowering the discount rate, it encourages borrowing. That increases liquidity and
boosts growth.
Fiscal Policy

Fiscal policy, measures employed by governments to stabilize

the economy, specifically by manipulating the levels and
allocations of taxes and government expenditures. Fiscal
measures are frequently used in tandem with monetary policy to
achieve certain goals. As similar to monetary policy, fiscal
policy can also be classified as expansionary and contractionary.
Okoro, defines fiscal policy as the efforts by the government to
use taxes and government spending to ensure the smooth
running of the economy. That is, the government uses these tools
to try to prevent high unemployment and high inflation.
Objectives of fiscal policy:
■ To achieve equal distribution of wealth
■ Increase in savings
■ Degree of inflation
■ To achieve economic stability
■ Price stability

Instruments of fiscal policy:

■ Taxes
■ Government expenditure
■ Public debt
■ Deficit financing
■ Taxes:
This is the main tool through government collects money from the public. The government collect
money from the public through income taxes, sales taxes, and other indirect taxes. Without taxes, a
government would have very little room to collect money from the public.
■ Government Expenditure:
To ensure economic growth, government needs to spend money on projects that matter. The projects
can be creating a subsidiary, paying the unemployed, persuading projects that are halted in between
etc.
■ Public Debt:
Public debt is a sound fiscal weapon to fight against inflation and deflation. It brings about economic
stability and full employment in an economy.
a. Borrowing from Non-bank public.
b. Borrowing from banking system.
■ Deficit Financing:
When the government meets its budgetary deficit by borrowing from the central government it is
called deficit financing. As a result of deficit financing income of the people goes up and hence
increase in the aggregate demand.
 CONCLUSION

Monetary policy refers to central bank activities that are directed toward influencing the
quantity of money and credit in an economy. By contrast, fiscal policy refers to the
government’s decisions about taxation and spending. Both monetary and fiscal policies are
used to regulate economic activity over time. They can be used to accelerate growth when
an economy starts to slow or to moderate growth and activity when an economy starts to
overheat.
In addition, fiscal policy can be used to redistribute income and wealth. The overarching
goal of both monetary and fiscal policy is normally the creation of an economic
environment where growth is stable and positive and inflation is stable and low.