The fiscal policy of a country is chiefly related to the economic state of affairs of that very nation. It refers to the strategy that the government of a country incorporates to tax its citizens and to make optimum use of that money. These decisions are not consistent for various periods and change with the passage of every year concentrating mainly on what exactly are the needs of the nation during a particular period and what amount of money is required to cater to those needs.
As for monetary policy, it differs from the fiscal policy in the way that monetary policy clearly and exclusively focuses on the strategy of the bank to regulate money and circulate it in an effective manner. This policy is also not the same for every year and changes in accordance with the demand and supply cycle of funds while in cohesive accordance the interest rate on which loans are offered also change. The main body that acts as the chief regulator in the monetary policy is the Central Bank of a country. (For example for Pakistan, it is the State Bank of Pakistan; for the United States, it is the Federal Reserve System).
Monetary supply refers to all these measures which are taken with a view to control money and credit supply in the country. When there is full employment and we are facing inflation, the central bank can reduces the total quantity of money in circulation. The bank can adopt different measures like bank rate policy, open market operation or rationing of credit.
On the other hand, in case of deflation the central bank can increase the quantity of money by lowering the bank rate, or purchasing the securities.
Monetary Policy has achieved very limited success in the past, because central bank has not full power over the supply of money and credit in the country. Moreover the quantity theory of money has failed during the world depression.
Fiscal Policy involves the process of shaping the public finance with a view to reduce fluctuations in the business and attainment of full employment with our inflation.
In case of inflation Govt. curtails the public works programs. Imposes heavy taxes discourages private investment, reduce the purchasing power by preparing surplus budget.
In case of deflation the Govt. spends money on the construction of canals, roads and offices. Increase in Govt. expenditure increases the income, employment, profit and consumption of the people. Deficit budget prepared and tax holidays are given.
The Fiscal policy must be co-ordinate with the monetary policy to improve its efficiency.
Fiscal Policy is basically the attempts of the government to influence direction of economy. This is done by manipulating the tax structure of the government or through fiscal allowances.
On the other hand, the Monetary Policy is the process through which government or the central bank controls the supply of money, its availability, cost or money, rate of interest etc. The main purpose behind all this process is to attain objectives of growth and stability of the economy.
On one hand, the monetary policy attempts to stabilize the economy by controlling interest rates and also the supply of money and on the other hand, the Fiscal policy manages the taxation structure of the economy.
Distinguish between monetary policy and fiscal policy.
Fiscal policy is a policy made by government of a country in order to maintain stability in the stability. Fiscal measures taken by government are taxes and government stability (developmental +non-developmental).
Monetary policy is the policy of central bank of a country whereby through change in interest rate and using various qualitative and stability tooLs central bank try to keep the economy stable.
Defference between monetary policy and fiscal policy
Describe the following functions of fiscal policies the distribution function the allocation function and the stabilization function