Fiscal and Monetary Policies

Monetary and Fiscal Policies

Monetary and fiscal policies are two techniques that countries use to govern the overall economy. Monetary policy employs the money supply and interest rates to promote stable economic growth, whereas fiscal policy uses government expenditure and taxation to impact the economy (Foresti 16). Although fiscal and monetary policy approaches differ, both aim to keep the economy stable. Fiscal policy has the greatest immediate impact on total demand for services and goods. The capacity of enterprises and consumers to get credit is affected by monetary policy. Implementation of Tighter Monetary and Fiscal Policy

The Tight Monetary Policies

The tight monetary policies are undertaken by the Federal Reserve to tighten spending in the economy to curb the level of inflation. The Federal Reserve will make money tight or tighten the policies by raising the short-term interest rates. The rising level of interest rates reduces the amount of money that organizations and individuals borrow because it becomes less attractive. On the other hand, the fiscal policies affect the total demand by altering the government spending.

Crowding Out Effect

Rising the interest rates in an economy can lead to crowding out. The high-interest rates discourage the business from making capital investments and have the effect of absorbing the economy’s lending capacity (Foresti 22). Pursuing the tighter monetary and fiscal policies affects the foreign competitiveness, leading to capital flights and disinvestments that in the long run displaces the private sector. When both monetary and fiscal policies are recklessly done, they can lead to crowding effect. The expansionary fiscal policy through the deficit spending might lead to a rise in the interest rate a fact that reduces consumption and investments.

Works Cited

Foresti, P. "MONETARY AND FISCAL POLICIES INTERACTION IN MONETARY UNIONS." Journal of Economic Surveys, 2017, doi:10.1111/joes.12194.