Question

Fiscal policy would be more effective than monetary policy during a typical recession and financial crisis. Why?

Answer 1

• It is a clear fact that fiscal policies help in combating recession and other financial crisis when compared to monetary policies.
• This is because, the fiscal policy tools may easily shorten the period of the recession.
• With fiscal policy tools, the economy can come back to its normal state more quickly.
• When compared to fiscal policy, monetary policy actions during financial crisis create very low impact on the economic growth.
• Tax cuts or increased spending may stimulate faster growth and directly encourage the economy in producing above the potential GDP.
• While these changes are observed much slower when monetary policy tools are used to bring back the economy to a normal state.