Modern economic systems are highly based upon a number of policies that contribute to the dynamics of economic activity. Fiscal and monetary policies are the crucial ones. Both are controlled by the government and central banks that have the controls like money supplies, inflation rates and the tax rates as well. These factors are obviously crucial to economic operations.
Fiscal policy is in the hands of government by which the spending levels and tax rates are controlled. It is helpful to monitor the influence of the nation’s economy. The policy insists that the government can solve macroeconomic problems through the tool of taxes and public spending. The fiscal policy emphasizes the power of the government to steer the economy. In this regard, the state should use its powers to increase aggregate demand by increasing spending and creating an easy money environment which eventually stimulates the economy by creating jobs.
Monetary policy is another mechanism through which a slow economy can be ignited. The policy is controlled by foreign reserves that aim to create an easy money environment. The monetary policy is used to control the money supply. Under the monetary policy, the central bank controls the open market operations that influence the money supply by buying and selling government securities.
Monetary and fiscal policies are like sister strategies though which economy could run efficiently. The combination of such policies is used to direct the country’s economic goals.