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Explain the difference between monetary and fiscal policy. It could discourage businesses to expand. Advantages of using fiscal policy is that it can significantly impact the national income and therefore have immediate effect on the economy. This also means lower interest rates and, eventually, more money for financial institutions to lend its borrowers. A monetary policy is a process undertaken by the government, central bank or currency board to control the availability and supply of money, as well as the amount of bank reserves and loan interest rates. A fiscal policy is the measures that a government takes so as to stabilize its economy. With this policy, interest rates can still increase, making businesses not willing to expand their operations, resulting to less production and eventually higher prices. If there is a delay in the implementation of the fiscal policy, it might reduce the effectiveness of the policy… When a fiscal policy is being developed, the writers must be aware of the specific areas they intend to target with the legislation. Planning for the spending is done once by most of the governments. Central banks can use the monetary policy to weaken the overall currency value on the global stage. One of the major tools of fiscal policy is the government's ability to borrow money. What is the major advantage of monetary policy over fiscal policy Offered Price: $ 2.00 Posted By: solutionshere Posted on: 03/21/2016 06:06 PM Due on: 04/20/2016 The quickness with which it can be used. The goal of monetary policy is to influence the macroeconomy more than to make it possible for specific people to come into power. Based on the ones listed above, what do you think? Monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect b. When the Fed wishes to raise interest rates and slow the economy it can do so without impacting the debt. Metcalf holds a master's degree in economics from Tufts University. The nature of fiscal policy is that it is very specific in its targets. Pros and Cons of Fiscal Policy. When a stimulus is necessary to keep growth happening, then banks can lower their interest rates on lending products to encourage additional spending. In an expansionary monetary policy, where banks are lowering interest rates on loans and mortgages, more business owners would be encouraged to expand their ventures, as they would have more available funds to borrow with affordable interest rates. Though a monetary policy is said to allow banks to enjoy lower interest rates from the Central Bank when they borrow money, some of them might have the funds, which means that there would be insufficient funds that people can borrow from them. Plus, prices of commodities would also be lowered, so consumers will have more reasons to purchase more goods. Monetary policy favours the 1% 4. While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to fiscal policy. Some advantages of using the fiscal policy are: They are specific and can stimulate specific growth. Which of the following is considered an advantage of monetary policy compared to fiscal policy. The former permits the market mechanism to operate smoothly. Otherwise, consequences may harm the economy. According to experts, changes that are made for a monetary policy might take years before they begin to take place and make changes felt, especially when it comes to inflation. A monetary policy would oblige policymakers to make announcements that are believable to consumers and business owners in terms of the type of policy to be expected in the future. If this is the case, export losses would be more than what commercial organizations could earn from their sales. 3. With things expected to be done immediately in these modern times, implementing a monetary can certainly take time, unlike other types of policies, such as a fiscal policy, that can help push more money into the economy faster. Policy measures taken to increase GDP and economic growth are called expansionary. Monetary policy tools like interest rate can spread the effect all over the nation. Disadvantage: Time Lag. Advantages of Fiscal Policy• Can have a significant impact on the Economy• Can be discriminating which allows different regions or consumption habits to prosper• Makes the distribution of income fairer through progressive taxes and benefits 13. One of the advantages of monetary policy over fiscal policy is that A) monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect. 5. Both fiscal and monetary policy can be either expansionary or contractionary. Monetary policy in normal times is 3. It allows for the imposition of quantitative easing by the Central Bank. Even the Federal Reserve can operate without being exposed to political influences. 4. Proponents of expansionary monetary policy state that even if banks lower interest rates for consumers to spend more money during a global recession, the export sector would suffer. Elected federal officials are all accountable to the public. 1. The goals of boosting the euro’s global standing and sharing its advantages more evenly are one and the same, writes Executive Board member Fabio Panetta. Fiscal policy inevitably involves borrowing money. According to the National Bureau of Economic Research, it began in December 2007, and the country was only able to enact the … Since the central bank can operate separately from the government, this will allow them to make the best decisions based upon how the economy is performing doing at a certain point in time. A monetary policy is a process undertaken by the government, central bank or currency board to control the availability and supply of money, as well as the amount of bank reserves and loan interest rates. It promotes transparency and predictability. Monetary policy can be implemented quickly. As inflation essentially makes an impact on the way we spend money and how much money is worth, a low inflation rate would allow us to make the best financial decisions in life without worrying about prices to drastically rise unexpectedly. B) monetary policy does not produce inflation, whereas fiscal policy does. When the federal government borrows, it competes with businesses and consumers who also borrow money -- businesses invest in buildings, equipment and property and consumers buy cars, houses and other consumer durables. And when decisions are made, action is immediate. A primary advantage is the speed with which changes can be implemented. Chapter 17 - Interest Rates and Monetary Policy 115. While the fiscal policy is framed and implemented by the government with regulation of its spending and collection of revenue, the monetary policy is controlled by the central bank of the country (in India, it … Its other goals are said to include maintaining balance in exchange rates, addressing unemployment problems and most importantly stabilizing the economy. Evaluate the advantages and the disadvantages of the current fiscal policy and monetary policy in USA.? Its relative isolation from political pressure. The Federal Open Market Committee, a major policy-making part of the Fed, can, too. A country’s economy is controlled by two types of economic measures – fiscal and monetary. Inflexibility - There are usually delays in the implementation of fiscal policy, because some proposed measures may have to go through legislative processes. Economists who criticize the Federal Reserve on imposing monetary policy argue that, during recessions, not all consumers would have the confidence to spend and take advantage of low interest rates, making it a disadvantage. The limits to fiscal policy are difficulty of changing spending levels, predicting the future. Advantages and disadvantages of government using fiscal or monetary .. One of the biggest perks of monetary policy is that it can help promote stable prices, which are very helpful in ensuring inflation rates will stay low throughout the country and even the world. Thomas Metcalf has worked as an economist, stockbroker and technology salesman. Workers would then lose their jobs. 3. Answer: Monetary Policy: It helps to limit the flow of money in order to reduce problems of unemployment, inflation and to stabilize business cycle. 5. It can take time to be implemented. In addition, taxes on negative externalities decreases consumption of negative externalities or demerit goods. 1. 2. Monetary policy tools encourage consumer activities based on the current status of the economy. Consequently, fiscal policy has an element of political expediency. “take away the punch bowl just when the party gets going.”, Confessions of a Supply-Side Liberal: Monetary vs. Fiscal Policy: Expansionary Monetary Policy Does Not Raise the Budget Deficit, Economics Help: Difference Between Monetary and Fiscal Policy. As monetary policy would lower interest rates, it would also mean lower payments home owners would be required for the mortgage of their houses, leaving homeowners more money to spend on other important things. 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