Monetary & Fiscal Policy

Decision & Implementation

 Monetary Policy is being implemented by
the central bank i.e. the RBI

 The Fiscal policy decisions are set by the

National government Both these policies
are adopted to control the economic
growth of the country.
Impacts
 A monetary policy is expected to improve the economy's rate
of growth of output ( which is measured by GDP

 Tight or restrictive monetary policy is designed to slow the

economy in the future to offset inflationary pressures.

 Fiscal policies, tax cuts, and spending increases are normally

expected to stimulate economic growth in the short run,
while tax increases and spending cuts tend to slow the rate of
future economic expansion.
Deals With
 Fiscal Policy and Monetary Policy both are the
major terms used in the economics and both
deal in the overall demand and supply of India

 Fiscal policy deals in government spending and

revenue collection by the way of tax. Whereas
Monetary Policy is a process which controls
the demand and supply of money
Affects
 Fiscal Policy can affect monetary policy

 Fiscal policy can affect the inflationary rates

also through its effect on aggregate demand.

 For E.g. We know that fiscal policy deals in

government spending and taxation, so if
government start levying extra tax then the
consumer will have less money in their
hands and thus less spending.
Affects

 Less spending means less demand that means more

supply and less demand which will ultimately result
in cheaper goods and thus the inflation rates will
start to lower

 If more liquidity is in the market then more money

will be there in the hands of the consumer which will
surge the demand and when too much of money is
running for too few goods this will result in higher
prices of the goods and thus higher inflation
Effects of Monetary Policy
 Monetary policy- it is an instrument used by the
government to influence the economic growth,
inflation, exchange rates, as well as
unemployment rate of the country

 Monetary Policy is been referred to as expansionary

or contractionary policy
Possibilities of Monetary Policy

 Contractionary policy is adopted when

government want to control the higher inflation
rate for which government reduces the money
supply or raises the interest rate

 Expansionary policy is adopted when there is a

liquidity crunch or when there is lack of money
supply for which size of the money supply is
increased or interest rates are decreased
Fiscal Policy Possibilities

For fiscal policy there are three possible

positions:

Neutral Position

Expansionary Position

Contractionary Position
Fiscal Policy Possibilities
A Neutral position applies when the budget outcome has
neutral effect on the level of economic activity where the
government spending is fully funded by the revenue collected
from the tax

An Expansionary position is when there is a higher budget

deficit where the government spending is higher than the
revenue collected from the tax

An Contractionary position is when there is a lower budget

deficit where the government spending is lower than the revenue
collected from the tax