Answer to Question #320172 in Microeconomics for dheeraj

Question

Discuss the effectiveness of fiscal and monetary policies in regulating economic activities in a country.

Answer 1

Governments rely on either monetary or fiscal policy to influence their macroeconomic results. Fiscal and monetary policies are essential in regulating economic activities in a country. Fiscal policy is the use of government spending and tax policies to influence economic states. In accord with fiscal policies, a government raises taxes and reduces spending; in case the economy is overheated. Also, the government can minimize tax rates and escalate expenditure to stimulate the economy. 

On the other hand, monetary policy is a set of actions kept by a nation's central bank to attain bearable economic progression by regulating the money supply. If there's rapid economic growth, the central bank implements a tight monetary policy by increasing interest rates and cutting the circulating money. On the contrary, the central bank cuts interest rates and makes borrowing cheaper while escalating the money supply to stimulate a faltering economy. Generally, monetary and fiscal tools are crucial to boosting economic development and keeping it stable with steady prices, low unemployment, and low inflation.