MONETARY POLICY
Monetary policy is the process undertaken by the monetary authority of the country in question to control the money supply, generally targeting an interest rate. In general, monetary policy is exercised to achieve a set of goals towards growth and stability of the economy. Typically, these goals or targets contain unemployment reduction and price stability. Monetary theory provides a way to do the best monetary policy.
Monetary policy can be either expansionary policy or contractionary policy. When an economy rapidly increases the total money supply it is said to be an expansionary policy and when an economy decreases the total money supply or increases it slowly, it is called a contractionary policy. Expansive policy generally used to overcome unemployment in recession by lowering the interest rate. Where as the Contract Policy is used to deal with inflation by increasing the interest rate.
Monetary policy is based on the association of interest rates in an economy. Money can be borrowed and supplied at this price. Monetary policy is a tool to have power over inflation, the exchange rate with foreign currencies, the growth of the economy and unemployment.
The most important thing for the authorities to follow is to make a reliable policy and denounce the interest rate targets because they are not very important with respect to monetary policy. If an employee thinks that the price will be higher in the future, then he would create a higher wage contract to meet this high price. So the lower wage belief indicates wage setting behavior between staff and owners. And although wages and less, there can be no demand inflation, since employees receive a lower salary and there will be no cost inflation, since employers do not play a lot of money in wages.
FISCAL POLICY
Fiscal policy is exercised for the government. spending and raising revenue to control the economy. Fiscal policy is different from other important policies, such as macroeconomic policy and monetary policy, which are used to control the economy with the help of the interest rate and the money supply. The main tools of fiscal policy are government spending and taxes. The transformation in the level and compilation of government taxes and payments can affect variables in an economy such as pent-up demand and levels of economic activity, the pattern of resource allocation, and income distribution.
There are three visions of fiscal policy, neutral, expansionary, and contractionary. All of these are defined as below;
• A neutral view of fiscal policy means a balanced economy. This includes the highest tax revenue, Govt. expenditures are fully supported by tax revenues and the overall budget result neutrally affects the level of the economy.
• An expansive view of fiscal policy contains public spending greater than fiscal revenue.
• In a situation where Govt. spending is less than tax revenue is called contractionary fiscal policy.
Governments spend money in various fields, including the military, police service, education and health sector, and governments make welfare payments. These expenses can be financed by different means such as taxes, issuance of new banknotes, internal and external indebtedness, use of tax revenues and sale of fixed assets. Some economists disagree with the concept that fiscal policy can have motivational consequences, it is called the Treasury Point of View.