• MONETARY AND FISCAL POLICIES
Monetary and Fiscal Policies
Monetary policy refers to the credit control
measures adopted by the central bank of a country.
Monetary policy is the macroeconomic policy laid
down by the central bank. It involves management
of money supply and interest rate and is the demand
side economic policy used by the government of a
country to achieve macroeconomic objectives like
inflation, consumption, growth and liquidity.
The main elements of monetary
• It regulates stock and growth rate of money
• Its regulates the entire banking system of the
• It regulates the level an structure of interest
rates directly in organized sector and indirectly
in unorganized sector.
• It determines the allocation of loans among
Objectives or Goals of Monetary
The following are the principal objectives of monetary policy:
• 1. Full Employment:
Full employment has been ranked among the foremost
objectives of monetary policy. It is an important goal not only
because unemployment leads to wastage of potential output,
but also because of the loss of social standing and self-respect.
• 2. Price Stability:
One of the policy objectives of monetary policy is to stabilize
the price level. Both economists and laymen favor this policy
because fluctuations in prices bring uncertainty and
instability to the economy.
• 3. Economic Growth:
One of the most important objectives of
monetary policy in recent years has been the
rapid economic growth of an economy.
Economic growth is defined as “the process
whereby the real per capita income of a country
increases over a long period of time.”
• 4. Balance of Payments:
Another objective of monetary policy since the
1950s has been to maintain equilibrium in the
balance of payments.
The term fiscal policy refers to the expenditure
and taxation policy of the government, which
can influence economic activity by its
expenditure program and imposing or lifting
taxation on certain goods and services.
Fiscal policy aims at raising financial resources
through taxation and borrowing within the
country and from abroad.
Objectives of Fiscal Policy:
• Promotion of economic development and
• Mobilization of resources.
• Reduction of inequalities of income.
• Expansion of employment.
• Price stability.
Business stabilization, full
employment and monetary policy
• Monetary policies use the level of the money
supply and interest rates to influence the level of
economic activity. The government may want to
use its monetary policy to either boost economic
activity or perhaps to reduce economic activity.
Help to reach Full Employment:
Presume that an economy is suffering from
unemployment because of deficiency of
investment. The proper policy is to promote
investment by -
1) The creation of additional money,
2) The creation of additional bank deposits, and
3) Greater velocity of circulation of money
through activation of idle cash balances.
Stabilize the economy and the level
of full employment:
Once full employment is achieved, the problem of
monetary policy is to maintain it by keeping the
equality of planned investment and planned saving
at full employment level. If planned investment is
allowed to exceed planned saving beyond the stage
of full employment, inflationary forces will tend to
appear whereas, if planned investment is allowed to
fall below planned savings, deflation will appear.
Therefore, the obvious monetary policy should be to
maintain the equality of planned saving and planned
investment at the level of full employment.
Monetary policy and control of
• Generally, the danger to full employment may
come when planned investment is allowed to
exceed planned saving, even after full
employment has been achieved and there are no
persons available to work. In such case, real
output cannot increase, despite the increase in
demand for goods and services.
Monetary Policy in a Less Developed
• Monetary policy was relegated to a secondary
place, the primary place being given to fiscal
policy. So if monetary policy plays only a
secondary role in an advance country in
maintaining full employment or in bringing
about price stability, its role in a less developed
country will naturally be still more limited. The
money market itself may be dominated by an
unorganized market which is outside the control
of the central banks.
• Inflation is the rate at which the general level
of prices for goods and services is rising and,
consequently, the purchasing power of currency
is falling. Central banks attempt to
limit inflation, and avoid deflation, in order to
keep the economy running smoothly.
• In general, inflation is a fall in the market value
of purchasing power of money.
Fiscal policy in a less developed
• The basic problem of an underdeveloped country
is to ensure ec0nomic growth. The objectives of
full employment is a distant dream of a
developing economy. While the advance
economy, is interested in preventing cyclical
unemployment, the less developed economy is
worried about chronic unemployment, disguised
unemployment and underemployment.
Goals of monetary and fiscal policy:
• Monetary and fiscal policies have common goals
such as the achievement of ‘full employment’. To
control inflation, the monetary policy aims at
high interest rates and tight money conditions
with the objectives of reducing investment and
expenditure in general.
• The fiscal policy aims at higher levels of taxation
and lowering of public expenditure or a policy of
Difference between fiscal and
Monetary policy Fiscal policy
• Monetary policy is the process
by which the monetary
authority of a country controls
the supply of money, often
targeting the rate of interest
for the purpose of promoting
economic growth and stability
• Fiscal policy are those policies
that influence the tax rates and
government expenditure in the