Ppt

1. ROLE OF MONETORY POLICY AND FISCAL
POLICY IN ECONOMY
Submitted BY
Laiba Shaheen 21011561-002
Maryam Shehzadi 21011561-007
Ayesha Azam 21011561-048
Laiba Yasir 21011561-064
Fatima Aslam 21011561-164
Submitted To
Mam. Sana Chaudary
BS Environmental Sciences
Department of Environmental Sciences
Session 2021-2025

2. ROLE OF MONETARY IN ECONOMY
Monetary policy involves the central bank's use of instruments to influence interest rates or money
supply in the economy with the objective of keeping overall prices and financial markets stable.
Monetary policy is typically the responsibility of a central bank. In the U.S that’s the Federal
Reserve,more specifically the Federal Open Market Committee (FOMC). The FOMC includes the
Fed Board of Governors who are presidential appointees confirmed by the Senate the New York
Fed president and regional Reserve bank presidents who serve as voting FOMC members on a
rotating basis. Monetary policy refers to actions the FOMC takes to pursue its dual mandate of
price stability and maximum sustainable employment.
Interest Rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent,
deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal
sum, the interest rate, the compounding frequency, and the length of time over which it is lent,
deposited, or borrowed. Interest rate targets are a vital tool of monetary policy and are taken into
account when dealing with variables like investment, inflation, and unemployment. The central
banks of countries generally tend to reduce interest rates when they wish to increase investment
and consumption in the country's economy. However, a low interest rate as a macro-economic
policy can be risky and may lead to the creation of an economic bubble, in which large amounts
of investments are poured into the real-estate market and stock market. In developed economies,
interest-rate adjustments are thus made to keep inflation within a target range for the health
of economic activities or cap the interest rate concurrently with economic growth to safeguard
economic momentum. Interest rate levels are a factor of the supply and demand of credit: an
increase in the demand for money or credit will raise interest rates, while a decrease in the
demand for credit will decrease them. Interest rate levels are a factor of the supply and demand of
credit: an increase in the demand for money or credit will raise interest rates, while a decrease in
the demand for credit will decrease them.

3. Impact of ainterest rate on Economy
In the United States, the Federal Reserve targets the federal funds rate and that is the primary tool
that the Fed uses to implement monetary policy. This is a market determined rate. It is determined
by the supply and demand for federal funds essentially, the deposits that banks have with the
Federal Reserve in the overnight market.
The Federal Reserve has an objective or a target for this market determined rate. It uses other
administered rates such as interest on excess reserves.In order to try to encourage the fed funds
rate to get as close to the target as possible.
If the federal funds rate is falling, then in some sense, the cost of funds for banks is falling. So
banks are able to pass that along to borrowers in the form of lower interest rates on car loans or
mortgage loans, and so forth.
It’s important to note, though, that short term rates such as rates on short-term Treasury bills and
securities, or money market rates are more closely tied to the federal funds rate than the rates on
longer-term loans.
Interest rates affect employment
Regarding employment, the classic textbook argument is that if a central bank wants to try to
boost employment, it uses its tools to try to encourage lower interest rates, which will stimulate
borrowing. That will enable more consumers to buy cars and houses, and it will encourage firms
to invest in new plants and equipment or to build up their inventories. In so doing, they’ll likely
hire workers, which will tend to lower the unemployment rate.
That’s the textbook Econ 101 version. In practice, it’s not quite so neat and simple, but that’s the
basic idea.
So while there may be ways a central bank can help boost employment in the short run, in the long
run, monetary policy is only going to affect the inflation rate. Unemployment and things in the real
economy are going to be determined by the technology, the amount of labor, even the weather
things that are not under the direct influence of monetary policy.

4. To what extent monetary policy assist
Clearly, there are some limits to what monetary policy can do. This pandemic is ofcourse,
something that public and private health experts are working on diligently. The Fed does not
employ doctors or clinicians or biologists, so we're not able to provide support in terms of the real
solution, identifying treatments or a vaccine for COVID-19.
Economically, the central bank is not the only game in town, and there are others who have an
important role in a situation like this.
But the Fed can to try to cushion the blow and help the economy weather whatever storm this is.
As Chairman Powell said at his March 3 press conference, “We can and will do our part to keep
the U.S economy strong as we meet this challenge.”
Goals of Economy
Basic goals are continually mentioned by personnel at the Federal Reserve and other central banks
when they discuss the objectives of monetary policy
: (1) high employment
(2) economic growth
(3) price exchange
(4) interest-rate stability
(5) stability of financial markets
(6) stability in foreign exchange
Effects of an Expansionary Monetary Policy
Expansionary monetary policy can bring some fundamental changes to the economy.
1. Stimulation of economic growth
Expansionary monetary policy reduces the cost of borrowing. Therefore, consumers tend to spend
more while businesses are encouraged to make larger capital investments.

5. 2. Increased inflation
The injection of additional money into the economy increases inflation levels. It can be both
advantageous and disadvantageous to the economy. The excessive increase in the money supply
may result in unsustainable inflation levels. On the other hand, the inflation increase may prevent
possible deflation, which can be more damaging than reasonable inflation.
3. Currency devaluation
The higher money supply reduces the value of the local currency. The devaluation is beneficial to
the economy’s export ability because exports become cheaper and more attractive to foreign
countries.
4. Decreased unemployment
The stimulation of capital investments creates additional jobs in the economy. Therefore, an
expansionary monetary policy generally reduces unemployment.
Effects of a Contractionary Monetary Policy
Contractionary monetary policy may result in some broad effects on an economy.
1. Reduced inflation
The inflation level is the main target of a contractionary monetary policy. By reducing the money
supply in the economy, policymakers are looking to reduce inflation and stabilize the prices in the
economy.
2. Slow down economic growth
Reducing the money supply usually slows down economic growth. As the money supply in the
economy decreases, individuals and businesses generally halt major investments and capital
expenditures, and companies slow down their production.
3. Increased unemployment
An unwanted side effect of a contractionary monetary policy is a rise in unemployment. The
economic slowdown and lower production cause companies to hire fewer employees. Therefore,
unemployment in the economy increases.

6. SBP to present monetary policy
The Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) will meet to discuss
monetary policy.
The committee raised the benchmark policy rate by 125 basis points (bps) to 15pc during the latest
monetary policy meeting in July 2022. Furthermore, it tied the interest rates of the Export Finance
Scheme (EFS) and the Long-Term Financing Facility (LTFF) to the policy rate and gave a 500-
basis point discount relative to the policy rate to encourage exports.
The majority of economists anticipate that the future monetary policy, which will be unveiled on
August 22, 2022, won’t change. They claimed that Pakistan’s trade deficit decreased by 18pc YoY
and 47pc MoM during the month of July 22 mostly as a result of a decrease in import costs. This
was a significant improvement in the economy recently.
Analysts anticipate that the government’s efforts to limit imports and the drop in global commodity
prices would result in a reduced current account deficit in FY23. This fiscal year’s current account
deficit is anticipated to be under $9b. According to experts at Topline, “We believe that policy rate
will stay stable in forthcoming monetary policy and are now close to its top where we can expect
a fall in policy rates in the second half of FY23.” As Pakistan signed a staff level agreement with
the IMF and the IMF’s board is anticipated to approve a tranche of $1.2b on August 29, 2022, they
said that since the last monetary policy pronouncement, expectations of an improvement in the
external account have grown.
The Pak Rupee has also started to rally against the US dollar after reaching a low of Rs240; as of
right now, it is trading at Rs214.65 per USD in the interbank market. They stated that these
encouraging news flows have raised the likelihood that future monetary policy will remain
unchanged.
However, given that the benchmark CPI inflation spiked to a 14-year high at around 25pc in July,
expect the State Bank of Pakistan’s (SBP) monetary policy committee (MPC) to raise the rate-
probably by 100 basis points. This is because the weekly inflation hit a record high of over 42pc
in the week that ended on Friday. As energy costs in the nation continue to rise, it is expected that
inflation would continue to rise. The policy rate is a tool the central bank has to manage inflation.
Furthermore, the central bank’s assertiveness in controlling excessive inflation through policy rate
hikes cannot be overlooked. The bank raised the rate by 125 basis points to 15pc at its most recent
meeting in July, despite the fact that a majority of economists expected a 100-basis-point hike and
a minority of analysts expected the central bank to retain the status quo.

7. The key policy rate, sometimes known as the benchmark interest rate, is still a tool that central
banks throughout the world may use to strike a balance between inflation and economic growth.
To alleviate economic problems, most of them (including the SBP) have kept the real interest rate
(policy rate minus inflation) in negative territory since the start of the Covid-19 epidemic. Experts
believe the rate will remain constant on Monday, blaming the uptick in inflation on an increase in
energy prices designed to recoup the IMF loan programme.
Pakistan appears to have fulfilled one of the two key goals of the increased policy rate. Imports
have been reduced considerably by policy measures to $4.9b in July 2022, down from $7.7b in
June 2022. The meeting would be presided over by SBP Deputy Governor Murtaza Syed,
according to the central bank. Earlier, the government named Jameel Ahmed as the bank’s new
governor for the next five years.
• Advantages and Disadvantages of Monetary Policy
List of Advantages of Monetary Policy
1. It can bring out the possibility of more investments coming in
and consumers spending more.
In an expansionary monetary policy, where banks are lowering interest
rates on loans and mortgages, more business owners would be encouraged
to expand their ventures, as they would have more available funds to
borrow with affordable interest rates. Plus, prices of commodities would
also be lowered, so consumers will have more reasons to purchase more
goods. As a result, businesses would gain more profit while consumers
can afford basic commodities, services and even property.
2. It allows for the imposition of quantitative easing by the Central
Bank.
The Federal Reserve can make use of a monetary policy to create or print
more money, allowing them to purchase government bonds from banks
and resulting to increased monetary base and cash reserves in banks. This
also means lower interest rates and, eventually, more money for financial
institutions to lend its borrowers.

8. 3. It can lead to lower rates of mortgage payments.
As monetary policy would lower interest rates, it would also mean lower
payments home owners would be required for the mortgage of their
houses, leaving homeowners more money to spend on other important
things. It would also mean that consumers will be able to settle their
monthly payments regularly—a win-win situation for creditors,
merchandisers and property investors as well!
4. It can promote low inflation rates.
One of the biggest perks of monetary policy is that it can help promote
stable prices, which are very helpful in ensuring inflation rates will stay
low throughout the country and even the world. As inflation essentially
makes an impact on the way we spend money and how much money is
worth, a low inflation rate would allow us to make the best financial
decisions in life without worrying about prices to drastically rise
unexpectedly.
5. It promotes transparency and predictability.
A monetary policy would oblige policymakers to make announcements
that are believable to consumers and business owners in terms of the type
of policy to be expected in the future.
6. It promotes political freedom.
Since the central bank can operate separately from the government, this
will allow them to make the best decisions based upon how the economy
is performing doing at a certain point in time. Also, the banks would
operate based on hard facts and data, rather than the wants and needs of
certain individuals. Even the Federal Reserve can operate without being
exposed to political influences.

9. List of Disadvantages of Monetary Policy
• It doesn’t guarantee economy recovery.
Economists who criticize the Federal Reserve on imposing monetary
policy argue that, during recessions, not all consumers would have the
confidence to spend and take advantage of low interest rates, making it a
disadvantage.
• It is not that useful during global recessions.
Proponents of expansionary monetary policy state that even if banks
lower interest rates for consumers to spend more money during a global
recession, the export sector would suffer. If this is the case, export losses
would be more than what commercial organizations could earn from their
sales.
• Its ability to cut interest rates is not a guarantee.
Though a monetary policy is said to allow banks to enjoy lower interest
rates from the Central Bank when they borrow money, some of them
might have the funds, which means that there would be insufficient funds
that people can borrow from them.
• It can take time to be implemented.
With things expected to be done immediately in these modern times,
implementing a monetary can certainly take time, unlike other types of
policies, such as a fiscal policy, that can help push more money into the
economy faster. According to experts, changes that are made for a
monetary policy might take years before they begin to take place and
make changes felt, especially when it comes to inflation.
• It could discourage businesses to expand.
With this policy, interest rates can still increase, making businesses not
willing to expand their operations, resulting to less production and
eventually higher prices. While consumers would not be able to afford

10. goods and services, it would take a long time for businesses to recover
and even cause them to close up shop. Workers would then lose their jobs.
Monetary policy is used in to help keep economic growth and stability,
but there is no guarantee that it would always help society, considering
that it also has its own set if drawbacks. Based on the ones listed above,
what do you think?
Role of Fiscal Policy in Economic Development of Pakistan
The various tools of fiscal policy such as budget, taxation, public expenditure, public works and
public debt can go a long way for maintaining full employment without inflationary and
deflationary forces in underdeveloped economies.
It is illustrated by the following points:
1. To Mobilize Resources:
The foremost aim of fiscal policy in underdeveloped countries is to mobilize resources in the
private and public sectors. Generally, the national income and per capita income is very low due
to low rate of savings. Therefore, the governments of such countries through forced savings
pushes the rate of investment and capital formation which in turn accelerates the rate of
economic development.
It also undertakes the policy of planned investment in the public sector. Private investments have
the favourable effect of increasing investment, the curtailment of conspicuous consumption and
investment in unproductive channels can help to check the inflationary trend in the economy.
Moreover, these countries face the problem of foreign capital. Thus the remedy lies in increasing
the incremental saving ratio, the marginal propensity to save through public finance, taxation
and forced loans.
To some extent, progressive taxation, heavy duty on luxury imports, ban on the manufacture of
luxury and semi-luxury goods are other measures which help to mobilize the resources,

11. Therefore, progressive taxation on windfall gains, on unearned incomes on capital gains, on
expenditure and real estates etc. can go a long way in equitable distribution of wealth.
2. To Accelerate the Rate of Growth:
Fiscal policy helps to accelerate the rate of economic growth by raising the rate of investment in
public as well as private sectors. Therefore, various tools of fiscal policy as taxation, public
borrowing, deficit financing and surpluses of public enterprises should be used in a combined
manner so that they may not adversely affect the consumption, production and distribution of
wealth.
In order to achieve balanced growth in different sectors of the economy, according to Prof. J.
Chelliah, the most fruitful line of advance lies along the path of a balanced development of
agriculture and industry. In short, investment in basic and capital goods industries and in social
overheads is the pillars of economic development in an underdeveloped economy. Thus, top
priority to such investment should be given to accelerate the all round growth of an economy.
3. To Encourage Socially Optimal Investment:
In underdeveloped countries, fiscal policy encourages the investment into those productive
channels which are considered socially and economically desirable. This means optimal
investment which promotes economic development and avoids wasteful and unproductive
investment.In short, aim of the fiscal policy should be to make investment on social and economic
overheads such as transportation, communication, technical training, education, health and soil
conservation. They tend to raise productivity and widen the market to enjoy external economies.
At the same time, unproductive investment is checked and diverted towards productive and
socially desirable channels.
4. Inducement to Investment and Capital Formation:
Fiscal policy plays crucial role in underdeveloped countries by making investment in strategic
industries and services of public utility on one side and induces investment in private sector by
giving assistance to new industries and introduces modern techniques of production. Thus,

12. investment on social and economic overheads are helpful in increasing the social marginal
productivity and thereby raising the marginal productivity of private investment and capital
formation. Here, optimum pattern of investment can also go a long way to yield fruitful results
of economic development.
Economic development is a most dynamic process which involves changes in the size and quality
of population, tastes, knowledge and social institutions. Keeping all factors in mind, if social
marginal productivity in socially desirable projects is low, fiscal policy should be framed to raise
social marginal productivity and to divert resources to that productive channels where the social
marginal productivity is the highest.
5. To Provide more Employment Opportunities:
Since in less developed countries, population grows at a very fast rate, the aim of fiscal policy in
such countries is to make high doses of expenditures which are helpful to raise employment
opportunities. Generally under developed economies suffer from unemployment.
Pakistan Budget Fiscal Year 2021-22
The incumbent government of Pakistan under Prime Minister Imran Khan has prested its third
budget for the Fiscal Year 2021-22. This budget has a value of Rs8.49 trillion, an increase of Rs700
billion over the last budget, and a GDP growth rate target of 4.8 percent.
The 2021-22 budget is important as the country has presented positive economic indicators over
the last 6 months of the FY21, and the Finance Minister in his speech yesterday on the release of
the Pakistan Economic Survey for the outgoing fiscal year highlighted the focus on growth, no
increased taxation on salaried class, the improvement in the IT, Industries and Agriculture sectors
of Pakistan.
Role of fiscal policy in economy:
Spending Policy:
If the government were to keep taxes the same, but decrease its spending, it would have the
same effect as a tax increase, but through a slightly different channel. • Instead of decreasing

13. disposable income and decreasing consumption (“C”), a decrease in government spending
decreases the “G” in C + I + G directly. • The lower demand flows through to the larger
economy, slows growth in income and employment, and dampens inflationary pressure.
Ricardian equivalence
The Ricardian equivalence theorem essentially states that government deficits are
anticipated by individuals who increase their saving because they realize that borrowing
today has to be repaid later. More precisely, bond-financed deficits must be met by a future
tax increase, which would be foreseen by individuals who would thus adjust their present
consumption accordingly.
If this theory is true, it would mean a tax cut financed by higher borrowing would have no
impact on increasing aggregate demand because consumers would save the tax cut to pay
the future tax increases. • It is argued that if the government borrows money to fund a tax
cut, rational consumers realize in the future taxes will have to rise to finance the borrowing.
Therefore, they save the extra income so that they can pay future tax rises. • Consumers
wish to smooth their consumption over the course of their life. Thus if consumers anticipate
a rise in taxes in the future they will save their current tax cuts to be able to pay future tax
rises.
• Fiscal Policy in Pakistan
In Pakistan, the fiscal deficit has a direct impact on inflation as government expenditure
constitutes a large part of aggregate expenditure that might lead to demand pull inflation,
and an indirect impact as the fiscal deficit is financed partly through the central bank.
• During the period between 1965 and 1972, due to domestic and international political
disturbances, the share of defense expenditure increased. In early 1970s, the initiation of
nationalization strategy also contributed to the massive fiscal expenditure in terms of public
investment. • Consequently, during the 1980s and 1990s, policy has been preoccupied by
the need to contain growing fiscal deficits and the accompanying increase in public
indebtedness, and efforts to curb the cost of debt servicing.
Stabilization of Price Level:-
Fiscal policy is also used to achieve desirable level of prices in the country. It means the
cost and price should be at such level that production and employment may increase. To
Attain Maximum Welfare of the People:- Fiscal policy main objective is to achieve

14. maximum welfare of the people. The quality of life must improve in the country. To Check
Rapid Increase in Consumption :- Fiscal policy is also used to check the rapid increase in
the consumption will be high then the rate of saving will be low and consequently rate of
investment will be low. A country cannot improve its economic condition without
increasing their investment. To Achieve
Economic Stability:-
The aim of fiscal policy is to increase the rate of production and employment without inflation.
So in the entire countries fiscal policy major objective is to ensure the economic stability in the
country.
The propensity to spend or save:
• Like the multiplier, the propensities to spend and to save are at work. • If the government
reduces taxes to stimulate consumption, but households save the money rather than spend
it, consumption will not rise, nor will investment. If people save the money, they are
“sitting on their wallets” and consumption remains low. • If consumption is low, businesses
won't invest. This has been a problem in the application of fiscal stimulus in Japan, where
people tend to save increases in income.