Fiscal and Monetary Policy - Economic Theory

This article on Desklib explains the concept of fiscal and monetary policy and their impact on the economy. It also discusses the difference between fixed and floating exchange rates and their role in financial stability. The article is relevant to the subject of economic theory and includes course codes and names, as well as references to books and journals.

Fiscal and monetary
policy - Economic
theory

Contents
MAIN BODY..................................................................................................................................3
Fiscal and Monetary Policy.........................................................................................................3
Fiscal and Monetary Policy under different exchange rate regimes............................................3
Differentiate between fixed and floating exchange rate..............................................................4
REFERENCES................................................................................................................................6

MAIN BODY
Fiscal and Monetary Policy.
Monetary Policy refers to action that the central bank of the country which means Bank of
England or the Government of UK will take for influencing that how much amount of money
exists in the economy (Chakraborty and Thomas, 2020).
Fiscal policy refers any consumption or income adjustment within any part of the public
authority. That means any adjustments to government spending, moving instalments or charges
by bureaucracies, state or neighbourhood legislatures, will address changes in financial strategy.
Since changes in consumption or income often affect the balance of executive spending plans,
we can equally say that adjustments to excess or shortage of public power address adjustments to
fiscal policy.
While government spending or mobile instalments increase, or tariff revenue falls, we
call this an expansionary monetary approach. These activities are also associated with the
expansion of insufficient spending plans by the public authorities or the reduction of excess
spending plans. If public authorities act to reduce government spending or shift instalments or
increase fee revenue, it is known as a contractionary financial approach. These activities are
likewise associated with a reduction in the public authority's financial planning deficit or a
widening of the financial planning excess.
Financial arrangements allude to the activities of the national bank, which are coordinated
to affect the amount of cash and credit in the economy. Paradoxically, the financial approach
implies the choice of tax assessment and spending by public authorities. After a while, both
currency-related and monetary methods were used to guide financial movements. They can be
used to accelerate development when the economy begins to slow, or to guide development and
action when the economy begins to overheat. Additionally, currency strategies can be used to
rearrange compensation and wealth (Siregar, 2022).
Fiscal and Monetary Policy under different exchange rate regimes.
Fiscal Policy under Fixed Exchange rate: It could be a major adjustment strategy under fixed
trade rates. It helps make up for the way financial strategies are currently unavailable.
Programmatic financial stabilizers take on this part. Optional changes in government spending or
tariffs are valuable as long as monetary strategy can respond quickly to impermanent shocks.

Fiscal Policy under Floating Exchange rate: It is firstly ineffective for the country’s fiscal policy
for the fixed exchange rate system. Because, the expansion in the rate of interest will cause
deficit for the country’s economy (Tung, 2021).
Monetary Policy under Fixed Exchange rate: Monetary policy change to keep loan costs fixed to
safeguard conversion scale. Financing costs will not change to aid the monetary approach or to
moderate the impact of financial arrangements. Therefore, any decline in home-grown benefits
can be offset by financial development to help rebuild possible outcomes. Assuming that the
adjustment of home-grown interest is the main explanation for the disengagement of the
continuous record balance from harmony, this financial extension will also rebuild the
continuous record balance.
Monetary Policy under Floating Exchange rate: Under this floating rate, the central bank which
means the Bank of England is not indulged to intervene in the exchange market internationally
for supporting a particular rate of exchange. In this, if the supply of money increases then the
rate of interest decreases which results in the increase in Aggregate Demand of the products
exchanged in UK.
Differentiate between fixed and floating exchange rate.
Fixed Exchange Rate Floating Exchange Rate
It is a nominal exchange rate which is fixed for
the future trade by the government of the
country.
It is determined depending on the changes in
the demand and supply of the products
exchanges in the country.
In is a fixed exchange rate that is stable until
the currency is exchanged.
It keeps on fluctuating constantly.
It reduced the necessity of the foreign reserves
as it keeps of changing.
Its stability helps in controlling the inflation
rate of the country and benefit the economy by
keeping the labour rate low.
It helps in preventing the imported inflation of
the country (Ullah, Ozturk and Sohail, 2021).
It ensures that the stability of the in the
international market is maintained and is not
influence by the daily fluctuation in trade
It causes an instable condition in the foreign
exchange market.

capacity.
The government intervention is there as the
rate is set by the central bank or the respective
government of the country.
There is no government intervention for the
fixation of the exchange rate against the base
the country’s government or central bank has
set.
It is supported by the international reserved
such as gold, because indirectly or directly
very currency is convertible to gold.
This type of exchange rate is not being
supported by the international reserve
committee and it influences the market.

REFERENCES
Books and Journals
Chakraborty, L. and Thomas, E., 2020. Covid-19 and macroeconomic uncertainty: fiscal and
monetary policy response (No. 20/302).
Siregar, I., 2022. The Effectiveness of Linguistics in Studying Fiscal and Monetary Policy
Issues. Budapest International Research and Critics Institute (BIRCI-Journal):
Humanities and Social Sciences, 5(1), pp.5285-5295.
Tung, L., 2021. Fiscal Policy, Monetary Policy and Price Volatility: Evidence from an Emerging
Economy (No. 7u56v). Center for Open Science.
Ullah, S., Ozturk, I. and Sohail, S., 2021. The asymmetric effects of fiscal and monetary policy
instruments on Pakistan’s environmental pollution. Environmental Science and
Pollution Research, 28(6), pp.7450-7461.