MONETARY &

FISCAL POLICY
 MONETARY FISCAL

 Policy which employs the  Refers to regulation of level of

central bank’s control of supply
• DEFINITION
of money.
 Changing the interest rate and
influencing the money supply.
government spending, taxation,
and public debt.
 To influence aggregate demand,
aggregate output, employment and
prices.

• Maintain domestic price stability. • Securing efficient allocation of

• Achieve a balance of payment
• OBJECTIVES equilibrium.
• Achieve full employment of resources.
• Achieve a higher rate of economic
growth.
• Achieve a continuously low structure
of interest rates.
economic resources.
• Attaining and maintaining full
employment.
• Accelerating the rate of economic
growth.
• Controlling the equitable distribution
of income and wealth.
 EXPANSIONARY CONTRACTION EXPANSIONARY CONTARCTION

• Increasing the • Decrease the • To overcome • Reduce demand

money supply in money supply in unemployment or and overcome
the economy. the economy. recession problem. inflation problem.

• This policy is • This policy is • Two types of • Policy with

employed either to employed to expenditure : decreasing
TYPES control
unemployment or
control inflation.  Operating
expenditure
government
expenditure and
OF during recession. • Increase interest
rate to overcome
 Development
expenditure
increasing the tax.

POLICY • Lower interest rate

to spurs growth.
inflation. Example : Transfer
payment
• Will affect
aggregate demand.

• Increase spending • Provide fewer

and decrease taxes transfer payment,
and to control cut the salary of
unemployment civil servants and
postpone its
• Encourage development
economic activities. project to reduce
the purchasing
Instruments
Statutory reserve @ Legal cash reserve
requirement
Minimum liquidity requirement
Open market operations
Bank discount or discount rate
Funding
Inflation
Quantitative
• Central bank will raise the minimum
legal cash reserve ratio in order to
restrain credit creation by commercial
banks and reduce money supply.
• Central bank will increase minimum
liquidity requirement.
• Selling of securities or short term
bonds.
• Purchase of these securities will
reduced the reserves of commercial
banks
• A high discount rate will be imposed
to reduce the loans to banking sector
• Managing the government debt by
replacing short-term securities with
longer term to influence the money
supply.
Unemployment
• Central bank lowers the requirement to
increase the cash resources of
commercial bank,
 Offer more loans to the public and
businessman.
• Central bank will decrease minimum
liquidity requirement.
• Buy/purchase of securities or short
terms bond.
• It will increase the money supply of
economy and increase power of
individual and firms.
• Decline in bank rate followed by
decline interest rate
 Increase borrowing and increased
investment by private businessman.
• Memendekkan tempoh kematangan
sijil jaminan kerajaan dan
mengurangkan pengeluaran bil
perbendaraan
 Qualitative

Selective credit control Central bank will prevent people Central bank will encourage
from buying assets in mortgages. people to buy assets in mortgages.

Modal persuasion Central bank will persuade Central bank will persuade
commercial bank to reduce loan commercial bank to increase
to public. lending for entrepreneur on
certain economic sector