Answer:
Fiscal and monetary policies address recessionary and inflationary
gaps in following ways:
- Both monetary and fiscal policy are macroeconomic tool used to
manage economy to function it properly.
- Monetary policy addresses interest rates and supply of money in
the economy which is being handled by central bank of the
country.
- Fiscal policy addresses taxation and government
expenditure.
- Monetary policy and Fiscal policy together have great influence
over a nation's economy, business and consumers.
- During recession both macroeconomic indicators follow below
mentioned measures to handle it:
- Fiscal Policy against recession:
- Central bank uses expansionary monetary policy to increase the
money supply in the economy.
- Central bank also reduces the interest rate and increases
number of loans in the economy.
- Monetary Policy against recession:
- During recession government decreases tax on individuals which
increases expenditure in the economy.
- Government starts spending directly as well in the form of
starting various infrastructure projects, investment schemes which
provides employment as well.
- During inflation both macroeconomic indicators follow below
mentioned measures to handle it:
- Fiscal Policy against inflation:
- Central bank uses Contractionary monetary policy to decrease
the money supply in the economy.
- Central bank also increases the interest rate and decreases
number of loans in the economy.
- Monetary Policy against inflation:
- During inflation government increases tax on individuals which
decreases expenditure in the economy.
- Government starts decreasing the direct spending as well in the
form of holding various infrastructure projects, and other
work.
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