{"id":1178950,"date":"2020-04-18T16:21:37","date_gmt":"2020-04-18T21:21:37","guid":{"rendered":"http:\/\/www.kereport.com\/?p=70688"},"modified":"2020-04-18T16:21:37","modified_gmt":"2020-04-18T21:21:37","slug":"monetary-policy-and-fiscal-policy","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1178950","title":{"rendered":"Monetary policy and Fiscal Policy."},"content":{"rendered":"<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><img decoding=\"async\" src=\"http:\/\/www.kereport.com\/wp-content\/uploads\/korelin-49.jpg\" alt=\"\" class=\"wp-image-70689\"\/><figcaption>For anyone not familiar with basic economic theory, please read the following as it is very basic, but it puts what Richard; jimmy; and I, presented into a clearly understandable perspective.<\/figcaption><\/figure>\n<\/div>\n<p>Fiscal Policy vs. Monetary Policy: Pros &amp; Cons<\/p>\n<ul>\n<li>FACEBOOK<\/li>\n<li>TWITTER<\/li>\n<li>LINKEDIN<\/li>\n<\/ul>\n<p>By&nbsp;<a href=\"https:\/\/www.investopedia.com\/contributors\/53677\/\">ADAM HAYES<\/a><\/p>\n<p>&nbsp;Updated Mar 26, 2020<\/p>\n<p>TABLE<br \/>\nOF CONTENTS<\/p>\n<ul>\n<li><a href=\"https:\/\/www.investopedia.com\/articles\/investing\/050615\/fiscal-vs-monetary-policy-pros-cons.asp#an-overview-of-monetary-policy\">An Overview<br \/>\n     of Monetary Policy<\/a><\/li>\n<li><a href=\"https:\/\/www.investopedia.com\/articles\/investing\/050615\/fiscal-vs-monetary-policy-pros-cons.asp#monetary-policy-pros-andcons\">Monetary<br \/>\n     Policy Pros and&nbsp;Cons<\/a><\/li>\n<li><a href=\"https:\/\/www.investopedia.com\/articles\/investing\/050615\/fiscal-vs-monetary-policy-pros-cons.asp#pros-andcons-of-fiscal-policy\">Pros<br \/>\n     and&nbsp;Cons of Fiscal Policy<\/a><\/li>\n<li><a href=\"https:\/\/www.investopedia.com\/articles\/investing\/050615\/fiscal-vs-monetary-policy-pros-cons.asp#the-bottom-line\">The Bottom<br \/>\n     Line<\/a><\/li>\n<\/ul>\n<p>When it comes to<br \/>\ninfluencing macroeconomic outcomes, governments have typically relied on one of<br \/>\ntwo primary courses of action:&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/m\/monetarypolicy.asp\">monetary policy<\/a>&nbsp;or&nbsp;fiscal policy.<\/p>\n<p>Monetary policy<br \/>\ninvolves the management of the money supply and interest rates by&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/c\/centralbank.asp\">central banks<\/a>.&nbsp;To stimulate a faltering<br \/>\neconomy, the central bank will cut interest rates, making it less expensive to<br \/>\nborrow while increasing the&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/m\/moneysupply.asp\">money supply<\/a>. If the economy is growing too<br \/>\nrapidly,&nbsp;the central bank can implement a tight&nbsp;monetary policy by<br \/>\nraising interest rates and removing money from circulation.<\/p>\n<p><a href=\"https:\/\/www.investopedia.com\/terms\/f\/fiscalpolicy.asp\">Fiscal policy<\/a>, on the other hand, determines<br \/>\nthe way in which the central government earns money through taxation and how it<br \/>\nspends money. To assist the economy, a government will cut&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/t\/taxrate.asp\">tax rates<\/a>&nbsp;while increasing its own spending;<br \/>\nto&nbsp;cool down an overheating economy,&nbsp;it will raise taxes and cut back<br \/>\non spending. There is much debate as to whether monetary policy or fiscal<br \/>\npolicy is the better economic tool, and each policy has pros and cons to<br \/>\nconsider.<\/p>\n<p>KEY TAKEAWAYS<\/p>\n<ul>\n<li>Central banks use monetary<br \/>\n     policy tools to keep economic growth in check and stimulate economies out<br \/>\n     of periods of recession.<\/li>\n<li>While central banks can be<br \/>\n     effective, there could be negative long-term consequences that stem from<br \/>\n     short-term fixes enacted in the present.<\/li>\n<li>Fiscal policy are the tools<br \/>\n     used by governments to change levels of taxation and spending to influence<br \/>\n     the economy.<\/li>\n<li>Fiscal policy can be swayed by<br \/>\n     politics and placating voters, which can lead to poor decisions that are<br \/>\n     not informed by data or economic theory.<\/li>\n<li>If<br \/>\n     monetary policy is not coordinated with fiscal policy enacted by governments,<br \/>\n     it can undermine efforts as well.<\/li>\n<\/ul>\n<p>An Overview of Monetary Policy<\/p>\n<p>Monetary<br \/>\npolicy&nbsp;refers to the actions taken by a country&#8217;s central bank to achieve<br \/>\nits&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/m\/macroeconomics.asp\">macroeconomic<\/a>&nbsp;policy objectives. Some<br \/>\ncentral banks are tasked with targeting a particular level of inflation. In the<br \/>\nUnited States, the Federal Reserve Bank&nbsp;(the Fed) has been established<br \/>\nwith a mandate to achieve maximum employment and&nbsp;price stability. This is<br \/>\nsometimes referred to as the Fed&#8217;s &#8220;dual mandate.&#8221;&nbsp;Most<br \/>\ncountries separate the monetary authority from any outside&nbsp;political<br \/>\ninfluence that could undermine its mandate or cloud its objectivity.&nbsp;As a<br \/>\nresult, many central banks, including the&nbsp;<a href=\"https:\/\/www.investopedia.com\/investing\/federal-reserve-monetary-policy\/\">Federal Reserve<\/a>, are operated as independent<br \/>\nagencies.<\/p>\n<p>When a country&#8217;s<br \/>\neconomy is growing at such a fast pace&nbsp;that&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/i\/inflation.asp\">inflation<\/a>&nbsp;increases to worrisome levels,<br \/>\nthe central bank will enact restrictive monetary policy to tighten the money<br \/>\nsupply, effectively reducing the amount of money in circulation and lowering<br \/>\nthe rate at which new money enters the system. Raising the prevailing risk-free<br \/>\ninterest rate will make money more expensive and increase borrowing costs,<br \/>\nreducing the demand for cash and loans. The Fed&nbsp;can also increase the<br \/>\nlevel of reserves commercial and retail banks must keep on hand, limiting their<br \/>\nability to generate new loans. Selling&nbsp;government bonds from its balance<br \/>\nsheet to the public in the open market also reduces the&nbsp;money<br \/>\nin&nbsp;circulation. Economists of the&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/m\/monetarist.asp\">Monetarist<\/a>&nbsp;school adhere to the virtues<br \/>\nof monetary policy.<\/p>\n<p>When a nation&#8217;s<br \/>\neconomy slides into a&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/r\/recession.asp\">recession<\/a>, these same policy tools can be<br \/>\noperated in reverse, constituting a loose or expansionary monetary policy. In<br \/>\nthis case, interest rates are lowered, reserve limits loosened, and<br \/>\nbonds&nbsp;are purchased in exchange for newly created money. If these<br \/>\ntraditional measures fall short, central banks can undertake unconventional<br \/>\nmonetary policies such as&nbsp;<a href=\"https:\/\/www.investopedia.com\/ask\/answers\/12\/quantitative-easing.asp\">quantitative easing<\/a>&nbsp;(QE).<\/p>\n<p>Monetary Policy Pros and&nbsp;Cons<\/p>\n<p>Pros<\/p>\n<ul>\n<li>Interest<br \/>\n     Rate Targeting Controls Inflation&nbsp;<\/li>\n<\/ul>\n<p>A small amount of inflation is healthy for a growing economy as<br \/>\nit encourages investment in the future and allows workers to expect higher<br \/>\nwages.&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/i\/inflation.asp\">Inflation<\/a>&nbsp;occurs when the general price<br \/>\nlevels of all goods and services in an economy increases. By raising the target<br \/>\ninterest rate, investment becomes more expensive and works to slow&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/e\/economicgrowth.asp\">economic growth<\/a>&nbsp;a bit.<\/p>\n<ul>\n<li>Can Be<br \/>\n     Implemented Fairly Easily&nbsp;<\/li>\n<\/ul>\n<p>Central banks can act quickly to use monetary policy tools.<br \/>\nOften, just signaling their intentions to the market can yield results.<\/p>\n<ul>\n<li>Central<br \/>\n     Banks Are Independent and Politically Neutral&nbsp;<\/li>\n<\/ul>\n<p>Even if monetary policy action is unpopular, it can be<br \/>\nundertaken before or during elections without the fear of political<br \/>\nrepercussions.<\/p>\n<ul>\n<li>Weakening<br \/>\n     the Currency Can Boost Exports&nbsp;<\/li>\n<\/ul>\n<p>Increasing the money supply or lowering interest rates tends to<br \/>\ndevalue the local currency. A&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/s\/weak-currency.asp\">weaker currency<\/a>&nbsp;on world markets can<br \/>\nserve to boost exports as these products are effectively less expensive for<br \/>\nforeigners to purchase. The opposite effect would happen for companies that are<br \/>\nmainly importers, hurting their bottom line.<\/p>\n<p>Cons<\/p>\n<ul>\n<li>Effects Have<br \/>\n     a Time Lag<\/li>\n<\/ul>\n<p>Even if implemented quickly, the macro effects of monetary<br \/>\npolicy generally occur after some time has passed. The effects on an economy<br \/>\nmay take months or even years to materialize. Some economists believe money is<br \/>\n&#8220;merely a veil,&#8221;&nbsp;and while serving to stimulate an economy in<br \/>\nthe short-run, it has no long-term effects except for raising the general level<br \/>\nof prices without boosting real economic output.<\/p>\n<ul>\n<li>Technical<br \/>\n     Limitations&nbsp;<\/li>\n<\/ul>\n<p>Interest rates can only be lowered nominally to 0%, which limits<br \/>\nthe bank&#8217;s use of this policy tool when interest rates are already low. Keeping<br \/>\nrates very low for prolonged periods of time can lead to a&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/l\/liquiditytrap.asp\">liquidity trap<\/a>. This tends to make monetary<br \/>\npolicy tools more effective during economic expansions than<br \/>\nrecessions.&nbsp;Some European central banks have recently experimented with<br \/>\na&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/n\/negative-interest-rate-policy-nirp.asp\">negative interest rate policy<\/a>&nbsp;(NIRP), but<br \/>\nthe results won&#8217;t be known for some time to come.&nbsp;<\/p>\n<ul>\n<li>Monetary<br \/>\n     Tools Are General and Affect an Entire Country&nbsp;<\/li>\n<\/ul>\n<p>Monetary policy tools such as interest rate levels have an economy-wide<br \/>\nimpact and do not account for the fact some areas in the country might not need<br \/>\nthe&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/e\/economic-stimulus.asp\">stimulus<\/a>, while states with high unemployment<br \/>\nmight need the stimulus more. It is also general in the sense that monetary<br \/>\ntools can&#8217;t be directed to solve a specific problem or boost a specific<br \/>\nindustry or region.<\/p>\n<ul>\n<li>The Risk of<br \/>\n     Hyperinflation<\/li>\n<\/ul>\n<p>When interest rates are set too low, over-borrowing at<br \/>\nartificially cheap rates can occur. This can then cause a&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/s\/speculativebubble.asp\">speculative bubble<\/a>, whereby prices increase<br \/>\ntoo quickly and to absurdly high levels. Adding more money to the economy can<br \/>\nalso run the risk of causing out-of-control inflation due to the premise<br \/>\nof&nbsp;<a href=\"https:\/\/www.investopedia.com\/articles\/economics\/11\/intro-supply-demand.asp\">supply and demand<\/a>: if more money is available<br \/>\nin circulation, the value of each unit of money will decrease given an<br \/>\nunchanged level of demand, making things priced in that money nominally more<br \/>\nexpensive.&nbsp;<\/p>\n<p>Pros and&nbsp;Cons of Fiscal Policy<\/p>\n<p>Fiscal<br \/>\npolicy&nbsp;refers to the tax and spending policies of a nation&#8217;s government. A<br \/>\ntight, or restrictive fiscal policy includes raising taxes and cutting back on<br \/>\nfederal spending. A loose or expansionary fiscal policy is just the opposite<br \/>\nand is used to encourage economic growth. Many fiscal policy tools are based on<br \/>\nKeynesian economics&nbsp;and&nbsp;hope to&nbsp;boost&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/a\/aggregatedemand.asp\">aggregate demand<\/a>.<\/p>\n<p>Pros<\/p>\n<ul>\n<li>Can Direct<br \/>\n     Spending To Specific Purposes<\/li>\n<\/ul>\n<p>Unlike monetary policy tools, which&nbsp;are general in nature,<br \/>\na government can direct spending toward&nbsp;specific projects, sectors&nbsp;or<br \/>\nregions to&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/e\/economic-stimulus.asp\">stimulate the economy<\/a>&nbsp;where it is perceived<br \/>\nto be needed to most.<\/p>\n<ul>\n<li>Can Use<br \/>\n     Taxation to Discourage Negative Externalities<\/li>\n<\/ul>\n<p>Taxing polluters or those that overuse limited resources can<br \/>\nhelp remove the negative effects they cause while generating government<br \/>\nrevenue.<\/p>\n<ul>\n<li>Short Time<br \/>\n     Lag<\/li>\n<\/ul>\n<p>The effects of fiscal policy tools can be seen much quicker than<br \/>\nthe effects of monetary tools.<\/p>\n<p>Cons<\/p>\n<ul>\n<li>May Be<br \/>\n     Politically Motivated<\/li>\n<\/ul>\n<p>Raising taxes is unpopular and can be politically dangerous to<br \/>\nimplement.<\/p>\n<ul>\n<li>Tax<br \/>\n     Incentives May Be Spent on Imports<\/li>\n<\/ul>\n<p>The effect of fiscal stimulus is muted when the money put into<br \/>\nthe economy through tax savings&nbsp;or government spending is spent on&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/i\/import.asp\">imports<\/a>,<br \/>\nsending that money abroad instead of keeping it in the local economy.&nbsp;<\/p>\n<ul>\n<li>Can Create<br \/>\n     Budget Deficits<\/li>\n<\/ul>\n<p>A government&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/b\/budget-deficit.asp\">budget deficit<\/a>&nbsp;is when it spends more<br \/>\nmoney annually than it takes in. If spending is high and taxes are low for too<br \/>\nlong, such a&nbsp;<a href=\"https:\/\/www.investopedia.com\/terms\/d\/deficit.asp\">deficit<\/a>&nbsp;can continue to widen to<br \/>\ndangerous levels.<\/p>\n<p>The Bottom Line<\/p>\n<p><a href=\"https:\/\/www.investopedia.com\/ask\/answers\/100314\/whats-difference-between-monetary-policy-and-fiscal-policy.asp#ixzz3YFi52S00\">Monetary and fiscal policy<\/a>&nbsp;tools are used<br \/>\nin concert to help keep economic growth stable with low inflation, low<br \/>\nunemployment, and stable prices. Unfortunately, there is no silver bullet or<br \/>\ngeneric strategy that can be implemented as both sets of policy tools carry<br \/>\nwith them their own pros and cons. Used effectively however, the net benefit is<br \/>\npositive to society, especially in stimulating demand following a crisis.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Fiscal Policy vs. Monetary Policy: Pros &amp; Cons FACEBOOK TWITTER LINKEDIN By&nbsp;ADAM HAYES &nbsp;Updated Mar 26, 2020 TABLE OF CONTENTS&#8230;<\/p>\n","protected":false},"author":21,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[362],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1178950"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1178950"}],"version-history":[{"count":4,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1178950\/revisions"}],"predecessor-version":[{"id":1178954,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1178950\/revisions\/1178954"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1178950"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1178950"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1178950"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}