Answer to Question #190972 in Macroeconomics for Zan

Question

Firstly, explain how monetary and fiscal policy is implemented and how they can be used to influence GDP and the price level.

 

Secondly, the quotation above highlights the unprecedented use that has been made of fiscal policy in countries such as the UK during the crisis. Briefly consider whether fiscal policy will remain the key policy instrument in these sorts of countries in the near future. 

Answer 1

Monetary policy is implemented by offering discount rates, federal fund rates and market operations while fiscal policy uses taxation as a tool for implementation.

Monetary policy increases money supply in the economy. The increased money supply maintains the price stability and increases the gross domestic product of the economy. This is because the increased money supply affects the interest rates and inflation in the economy. In fiscal policy, taxation can encourage or discourage consumption. Low taxation raises the gross domestic product as it encourages Consumer spending. On the other hand, high taxation discourage consumption which leads to low output and price.

Fiscal policy will remain the key policy instrument in countries during a crisis in the near future because the policy stimulates demand in recession by stimulating economic growth with low interest, thereby encouraging new investment.