Presentation on

Monetary & Fiscal

Policy

Submitted To: John Morgan

Submitted By: Sachin Tandukar
 MONETARY POLICY
Monetary policy is how central banks
manage liquidity to create economic
growth. Liquidity is how much there is in
the money supply. That includes credit,
cash, checks and money market mutual
funds. The most important of these is
credit. It includes loans, bonds and
mortgages
HOW MONETARY POLICY
WORKS
The Central Bank may have an inflation
target of 2%. If they feel inflation is going
to go above the inflation target, due to
economic growth being too quick, then will
increase interest rates.

Higher interest rates increase borrowing

costs and reduce consumer spending and
investment, leading to lower aggregate
demand and lower inflation

If the economy went into recession, the

Central Bank would cut interest rates.
 INSTRUMENTS OF
MONETARY POLICY
Bank rate policy

Open market operations

Higher CRR & SLR

Selective credit controls(margin

requirements)
 EXPANSIONARY
MONETARY POLICY
It is used to overcome recession or
depression

When there is fall in consumer & business

demand the government eases the credit
market conditions, purchases government
securities lowers the reserve requirements
which leads to an upward shift in the AD.
 RESTRICTIVE
MONETARY POLICY
Restrictive monetary policy is how central
banks slow economic growth. Its called
restrictive because the banks restrict
liquidity. That reduces the amount of
money and credit that banks can lend. It
lowers the money supply by making loans,
credit cards and mortgages more
expensive. That constricts demand, which
slows economic growth and inflation
 FISCAL POLICY
Fiscal Policy involves the decisions that a
government makes regarding collection of
revenue, through taxation and about
spending that revenue. It is often
contrasted with Monetary Policy, in which a
central bank(like the federal Reserve in the
United States) sets interest rates and
determines the level of the money supply.
 HOW FISCAL POLICY
WORKS
Fiscal policy is based on the theories of British
economist John Maynard Keynes. Also known as
Keynesian economics, this theory basically states that
governments can influence macroeconomics
productivity levels by increasing or decreasing tax
levels and public spending.

Fiscal policy is very important to the economy. For

example, in 2012 many worried that the fiscal cliff, a
simultaneous increase in tax rates and cuts in
government spending set to occur in January 2013,
would send the U.S. economy back to recession. The
U.S. Congress avoided this problem by passing the
American Taxpayer Relief Act of 2012 on Jan.1,2013
 INSTRUMENTS OF
FISCAL POLICY
Levels of taxation

Public debts

Levels of government spending

EXPANSIONARY FISCAL
POLICY
Expansionary Fiscal Policy is designed to stimulate the
economy during or anticipation of a business-cycle
contraction. This is accomplished by increasing
aggregate expenditures and aggregate demand
through an increase in government spending or
decreases in taxes. Expansionary Fiscal Policy leads to a
larger government budget deficit or a smaller budget
surplus.

It works through the two sides of the governments

fiscal budget; spending and taxes. However, its often
useful to separate these two sides into three specific
tools; government purchases, taxes and transfer
payments.
 WHICH IS MORE
EFFECTIVE MONETARY
OR FISCAL POLICY?
In recent decades, monetary policy has
become more popular because:

1. Monetary policy is set by the Central bank and

therefore reduces political influence

2. Fiscal policy can have more supply side effects

on the wider economy. E.g. to reduce inflation -
higher tax and lower spending would not be
popular and the government may be reluctant
to purse this. Also lower spending could lead to
reduced public services and the higher income
tax could create disincentives to work.
 CONTD
However, the recent recession shows that
monetary policy too can have many
limitations.

1. Targeting inflation is too narrow. This

meant central banks ignored an
unsustainable boom in housing market and
bank lending.

2. In a liquidity trap, expansionary fiscal

policy will not cause crowding out because
the government is making use of surplus
saving to inject demand into the economy.
THANK YOU