Question

In your opinion, which policy is more effective to stabilize the economy? Fiscal or Monetary Policy? Briefly discuss.

Answer 1

In order to stabilize the economy, a single policy does not work. It is generally seen that a combination of both monetary and fiscal policy is needed to stabilize the economy. For instance, in times of recession expansionary fiscal policy is followed. But this policy of the government leads to crowding out effect on the economy. In order to prevent this crowding out impact, expansionary monetary policy is needed to keep interest rates constant. This will prevent crowding out impact on the economy. Also, in times of 2008 recession, a combination of both monetary and fiscal policy was followed by Federal bank and government to move the economy out of recession.