Get premium membership and access questions with answers, video lessons as well as revision papers.

Explain the coordination of Monetary and Fiscal Policies

      

Explain the coordination of Monetary and Fiscal Policies

  

Answers


Wilfred
These are two interrelated policies. Monetary policy has fiscal implication and fiscal policy has monetary implications. Monetary policy provides stability in the long run leaving the fiscal policy to provide the built-in stabilizers to iron –out short run fluctuation. Monetary policy provides the financial infrastructure while fiscal policy through its instrument of taxation borrowing and deficit spending has an impact on money supply and liquidity in the economy. Monetary and fiscal policies are interdependent and mutually reinforce each other. Fiscal policy owes, much of its success its coordination with monetary policy e.g. a large public borrowing program depends for its success the Central Bank rate and open market operations (OMO) designed to stabilize the price of the securities in the money market.
A cheap money supply will reduce the rate of interests and facilitate government borrowing. Each must reinforce the other in the interest of growth with stability. Monetary and fiscal policies have to be integrated. Monetary policy is more flexible and can be adjusted to changing needs. Monetary policy is a weapon against inflation while fiscal policy is a weapon against deflation. Each has its point of strength and points of weaknesses. They have to be suitably combined to meet economic needs as they are complimentary.
Wilfykil answered the question on March 9, 2019 at 07:54


Next: Give the limitations of Fiscal Policy
Previous: State and explain the Determinants of Rate of Exchange

View More Money and Banking Questions and Answers | Return to Questions Index


Learn High School English on YouTube

Related Questions