Question

A healthy economy typically has low rates of unemployment and steady prices. Low rates of unemployment means that the economy is operating at its full potential. To ensure the economy continues to operate at potential GDP (full capacity where all savings are invested in production functions, and where all those who wish to work can find a job, and all other factors of production are fully utilized in the production function), governments use fiscal and monetary policies to lower unemployment rates and to control prices (inflation).

which policy is more effective—monetary policy or fiscal policy? Why?

Answer 1

Answer - The fiscal policies are more effective in nature than the monetary policies. This is because the time it takes for the fiscal policy to show impact on the economy is very less as compared to the monetary policy. Monetary policy basically take the indirect route of motivating the investment or the overall demand. This is done through reserve ratio , or OPO , which bring the change in interest rates and then investment change. But fiscal policy provides the direct incentive , provides quick employment through government spending on infrastructure , or reduction in inflation through increased taxes. Hence fiscal policy is quick to respond and hence more effective.