Answer to Question #266927 in Macroeconomics for Sharti Siral

Question

In 1.5 pages, review the fiscal and monetary policy actions adopted by Fiji to address the negative impacts on these three macroeconomic variables, discuss these policies and explain how these policies would address the negative impacts.

Answer 1

Monetary and fiscal policy

Monetary policy and fiscal policy are the most commonly used tools influencing a country's economic performance. Different authorities typically implement these two separate policies using different tools and tools. Meanwhile, in Fiji, the Reserve Bank of Fiji (RBF) has the primary responsibility for setting monetary policy, and its main objective is to ensure stable inflation and maintain an adequate level of foreign exchange reserves critical for economic growth.

Fiscal policy, on the other hand, is implemented by governments to achieve sustainable economic growth, stimulate investment, keep public debt at an acceptable level, and, above all, ensure efficient use of resources. The success of both the RBF and government in achieving these basic and often interdependent goals will depend on aggregate demand for these policies or, more generally, the response of economic activity. To achieve both monetary and fiscal goals, the RBF and government work together to adjust or adjust policies in the best way possible.

The policy tools

To achieve its goal, the RBF uses one or a combination of the reserve requirements established for commercial banks and open market operations to influence the interest rate or the economy's total money supply. In fact, RBFs use overnight interest rates (OPRs) to communicate monetary policy, and a fall in OPR means monetary easing and vice versa. The OPR is reviewed monthly by the RBF Monetary Policy Committee and the RBF Committee. It last fell from 1.5% in November 2011 to 0.5% now to support investment and economic growth. Government fiscal policy instruments include adjusting spending levels, tax rates, and tax types to influence economic activity. By regulating spending, governments affect their direct contribution to economic activity and therefore can affect gross domestic product (GDP). Taxes are also a fiscal policy tool because changes in tax rates affect average consumer income and affect consumption, investment, savings, and economic activity.

How the policies work

The RBF is using changes to the OPR to ensure low inflation and adequate foreign exchange reserves to support economic growth. For example, if the economy is "overheating," that is, consumption and income are growing too much to help keep the economy on a sustainable path, RBF can increase OPR to help cool the economy. can. This represents an increase in borrowing costs (interest rates), which slows economic spending and curbs excessive consumption. In terms of fiscal policy, when the government detects that the economy is slowing down or that there is not enough spending or business, it puts more money into the economy to increase expenditure (spending). Governments can also help economic growth by easing tax policies to stimulate business and confidence. This is known as expansionary fiscal policy because its main purpose is to stimulate economic activity. In contrast, contractionary fiscal policy is when the government cuts spending or raises tax rates.