Governments Manage Economy Through Two Policy Instruments : Fiscal Policy And Monetary Policy

1149 Words May 8th, 2016 null Page
1. Governments manage economy through two policy instruments - fiscal policy & monetary policy. Whereas the former is used regulate the expenditure & earnings of government, including taxes, the latter is used to regulate the money supply & level of interest rates. Usually these two roles are performed by two different branches of government across most of the countries. Central banks are responsible for monetary policy and the legislative & executive arms of government are responsible for fiscal policy. The extent & distribution of powers may differ from country to country but essentially the role division runs the same.

The reason for separation of roles are:

A. These two policies have differing objectives and require specialized skills and powers.

B. It provides necessary checks & balances. For instance, an inefficient govenment may run huge fiscal deficits and if it is also managing the money supply then it may resort to deficit financing as a near term solution. Of course this may be disastrous for economy in the long run. Therefore, need for an independent and specialized agency to run monetary policy.

C. Taxation can be and should be levied by popularly elected governments who represent people and not technocrats. Likewise, regulating banks and managing inflation is tasked to central banks for their expertise.

D . Executive and legislatures elected by people are responsible for employment and welfare and would like to be seen doing that through fiscal policy…

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