Question 8-Is fiscal policy more effective than monetary?

Question 1

Is Fiscal policy more effective than monetary?

Answer 1

Fiscal policy is linked to Keyesian economic theory, which suggests that government intervention is required to influence aggregate demand and thus economic stability and prosperity.

Fiscal policy tools include:

Changing taxes

Increasing or decreasing government expenditure on transfer payments (ie welfare) or goods and services

Question 2

What is monetary policy?

Answer 2

Monetary poilcy is the utilization of the Reseve Bank to ifluence aggregate demand by charging interest rates and money supply.

The question as to which policy method is more effective is debatable.

During the course of the GFC governments including the Australian Government at the time attempted to increase aggregate demand with a combination of fiscal and monetary measures.

Question 3

What did fiscal policy include?

Answer 3

Fiscal policy included the introduction or transfer payments (monetary payments to individuals and families in the form of tax rebates) in addition to committing expediture on schools, defence equipment and infrastructure projects such as roads.

At the same time moetary policy of the australian reserve bank lowered interest rates to stimulate demand.

Many would argue that where immediate fast acting demand stimulation is required, monetary policy is more effective as a change in interest rates can be implemented quickly and its impact felt immediately with increased spending and confidence.

Question 4

Drawbacks of fiscal

Answer 4

Fiscal policy is more politically fraught and takes time to be initiated and then filter through to demand.

Having said this Japans long term zero interest rate policy did not achieve the immediate positive impacts on expanding aggregate demand anticipated.

The negative of fiscal policy is that flowing from increased government ecpediture ultimately comes higher national debt and this long run is considered an economic negative as it can lead to increased taxes which can stifle aggregate demand.

Question 5

There is no correct answer in respect to superior effectiveness of fiscal versus monetary policy.

Answer 5

Both have a role in the management of aggregate demand and both contain levers which assist in the maintenance of economic prosperity and growth.