This kind of policy of using both the measures simultaneously is called as “ Policy of Surplus Budgeting,” which says that “government should spend less than the tax revenue.”, Your email address will not be published. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. The economy’s levels of output, employ­ment, and income are influenced by the rela­tionship between the amount that the govern­ment levies in taxes and the amount that it spends. Fiscal policy uses government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, and inflation… Expansionary fiscal policy will require higher government borrowing – this may not be possible for countries with high levels of debt, and rising bond yields. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals. With a cut in public expenditure, the government demand for goods and services decreases along with a decrease in the private income and consumption expenditure. Partly due to monetary policy‘s lack of clear focus, macroeconomic conditions deteriorated steadily during the period prior to the 1990s.The persistent use of the central bank to finance fiscal deficits as well as failure of the monetary authority to control money supply resulted in rising inflation (Bigstern and Mugerwa, 2000). Fiscal Measures: Monetary policy alone is incapable of controlling inflation. Expansionary fiscal policy will only reduce unemployment if there is an output gap. It uses secondary data on inflation, exchange rate, Treasury bill rate, money supply, GDP growth, oil prices and world food prices. This change in fiscal policy is notable, as expanding fiscal stimulus when the economy is not depressed can result in rising interest rates, a growing trade deficit, and accelerating inflation. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. MPC have reduced inflation … This improves the budget situation and helps to reduce demand in the economy.Both these policies reduce inflation by reducing the growth of Aggregate Demand. If there is high unemployment, policy­makers can take action to increase the level of aggregate spending and, consequently, the level of economic activity. 2. Fiscal policy, on the other hand, determines the way in which the central government earns money through taxation and how it spends money.To assist the economy, a … Discretionary fiscal policy decisions are also needed to preserve the sustainability of public finances in the medium-term. ADVERTISEMENTS: The relative effectiveness of monetary and fiscal policy has been the subject of controversy among economists. Disclaimer Copyright, Share Your Knowledge They predict future inflation trends. The original equilibrium (E 0) represents a recession, occurring at a quantity of output (Y 0) below potential GDP.However, a shift of aggregate demand from AD 0 to AD 1, enacted through an expansionary fiscal policy, can move the economy to a new equilibrium output of E 1 at the level of potential GDP which is shown by the LRAS curve. Effectiveness of Monetary Policy 2. The three objectives of monetary policy are controlling inflation, managing employment levels, and maintaining long term interest rates. If inflation looks to be increasing above the govts target then they can increase interest rates to reduce consumer spending and keep inflation on track. This study determines the effectiveness of monetary policy in controlling inflation in Kenya. Expansionary Fiscal Policy. Monetary Policy is pre-emptive. Share Your Word File 2  The business cycle will be in the expansion phase. 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