Question

FISCAL OR MONETARY POLICY?

Think back to the discussion of the fiscal policy.

1. In the event of a financial crisis, would it be preferable for the government to stabilize the economy using fiscal or monetary policy?

2. What are the dangers of using fiscal policy?

3. When might the government have no choice but to use fiscal policy?

Answer 1

In financial crisis, government needs to adopt mix of fiscal and monetary policy stimulus as either of them alone is insufficient to revive demand and economic growth. An expansionary fiscal policy by reducing taxes and inducing higher spending and automatic stabilizers is must.

Dangers of fiscal policy are degradation in sovereignty rating, implementation lags, fiscal deficit which arise out of it.

Government has to choose fiscal policy when central banks monetary policy is inefficient and ineffective and causes huge cost to economy.