Impact Of Fiscal And Monetary Policy On Business Organizations And Their Activities
Today we will describe the fiscal vs. monetary policy pros and cons. And also discuss the impact of current fiscal and monetary policy on the economy.
When we talk about macroeconomics the main two approaches comes to our mind. The first one is monetary policy and the other one is fiscal policy. We can write it Fiscal vs. Monetary Policy policy also. Mostly all government depends on these approaches. Generally, monetary policy relates to control of money supply management to the market. Then fiscal policy mainly involves the process of getting money earrings by the central government. Below you will be explained in details. That way you can measure yourself and have a clear concept of it. This policy also impacts on accounts of an organization. When an organization policy maker makes their policy they also concern about the government financial and monitory policy and make sure they also cover their financial policy in this circumstance. In accounting, accounting stator body are implying rules and regulation for maintaining their accounts with the measuring of policies. So that the organizations also maintain their financial statement, cash flow statement and also all of the accounts are maintained in this policy.
- 1 Pros and Cons of Monetary Policy
- 1.1 PRO: Zero inflation target
- 1.2 CON: Conflicting goals
- 1.3 PRO: Political independence
- 1.4 CON: Temporary delay
- 1.5 PRO: Controlled Inflation
- 1.6 CON: Hyperinflation may occur
- 1.7 PRO: Quite manageable
- 1.8 CON: Lag can happen
- 1.9 PRO: Can make neutral decisions
- 1.10 CON: Limitations
- 1.11 PRO: Boost exports
- 1.12 CON: Affect the whole nation
- 1.13 Pros and Cons of Fiscal Policy
- 1.14 PRO: To boost the economy
- 1.15 CON: Reaction get slow
- 1.16 PRO: Control of exchange rate inflation
- 1.17 CON: Forecast errors
- 1.18 Summary:
Monetary policy acts more indirectly in the economy. It consists of controlling interest rates to influence consumption and investment then production, inflation, and employment. Its general objective is to influence the evolution of the economy by smoothing the effects of the economic cycle. To protect from the external political influence maximum countries in the world make separate monetary authority. These steps keep them unbiased and safe. For instance, in the case of the United State, they came with dual mandate scheme. Their goal is to maintain price stability and maximum employment. You can also check out this article to gain knowledge on pros and cons of expansionary monetary policy.
Fiscal policy consists of the use of taxes and public expenditure. Taxes tend to affect the income of individuals and public spending effects. The overall level of spending of the economy and therefore influences GDP. An expansive fiscal policy translates into an increase in public spending. A reduction in taxes a restrictive policy does the opposite. Therefore, one can think that monetary and fiscal policy substituted in the management of demand.
Pros and Cons of Monetary Policy
In accounting monetary policy are played big rule to maintained accounts. If you want to know about pros and cons of monetary policy, this article is for you.
PRO: Zero inflation target
The two aims of monetary policy are to support maximum stage of economic sustainability. It also promotes a fixed price system. That monetary policy can attain low inflation in the long term. Inflation decreases the purchasing rule of money, damaging economic growth. Stable prices allow individuals and companies to create financial methods without worrying about sudden and unexpected increases in prices.
CON: Conflicting goals
The Federal Reserve and other central banks can use monetary policy to achieve low inflation in the long term. It is to affect the economy and employment levels in the short term. These goals sometimes conflict. Reducing interest rates to expand the money supply and keep unemployment rates at bay during a recession.
PRO: Political independence
When central banks operate, they are free of political pressure. They can make decisions based on economic conditions. When the central bank lacks independence, monetary policy becomes subject to political pressure.
CON: Temporary delay
Indifference to fiscal plan, it rapidly stimulates the introduction of money to the economy to the extent. That the government increases its level of spending on public programs and projects. In terms of fiscal vs. monetary policy pros and cons, as a con monetary policy implementations take a longer time to act on the economy. Monetary policy procedures affect the economy and employment levels. Actions can obtain even lengthy to impact inflation, on occasion more than two years.
PRO: Controlled Inflation
If the monetary policy gets well managed, then we can expect a low amount of inflation. This is actually good for our evolving economy because this way we can see lots of investment in the future. And it similarly keeps encouraging the worker to be paid more. However, if monetary policy not controlled properly it will make our life hell. We could encounter reverse effects.
CON: Hyperinflation may occur
Monetary policy should be controlled by well-designed implementations. If the scheme doesn’t work, then hyperinflation may cause. When interest rates settled in much lower rate, then it can cause a speculative bubble. When hyperinflation affects the economy all prices of goods and services are increased very quickly. If the situation continues for a longer period, it will create inflation that is going to be totally out of hand.
PRO: Quite manageable
If something starts going wrong on the economy central bank can do effective steps to prevent that. Sometimes central bank’s initiatives can manage the inflation only by displaying tough measures. This is only possible if the authority act very responsive to the monetary policy.
CON: Lag can happen
Although, after acting quickly the results might not show instantly. The macro effects can become time lagged behind the monetary policy. It can cost months or maybe even years to take effects on an economy.
PRO: Can make neutral decisions
Central banks are fully authorized by the system of a country. They have full power to take steps what’s good for us. Central banks are fearless and often can take bold and effective measures.
Despite being independent central bank sometimes can also hold technical margins. They have certain limits on setting interest rates. They cannot go beyond of that limit. However, placing interest rates at the lowest point for a long time can lead an economy to a liquidity trap.
PRO: Boost exports
By using monetary policy central bank can lower the interest rates or supplying more money to the market they can degrade the local currency. In both ways, they can get success at their goals. On the world market, a devalued currency might serve to increase exports. Because of if your product can be sold at a lower price, foreigners tend to buy those less expensive products more frequently.
CON: Affect the whole nation
Those monetary policies can affect the nation. Although weakening money boost exports but it has cons too. Your country’s importer companies will face the real threat. Monetary policy tools like interest rate can spread the effect all over the nation. So, decisions should be taken wisely. Otherwise, consequences may harm the economy.
Pros and Cons of Fiscal Policy
Below the fiscal policy advantages and disadvantages have discussed respectively. Talking about fiscal here, there is another post on advantages and disadvantages of expansionary fiscal policy. You can read it from here.
PRO: To boost the economy
As a part of fiscal policy, we can put on the point as the pro the government can employ fiscal policy to improve the level of total order in the economy. All demand is the total order for all goods and services for a nation. A government improves demand in some methods.
CON: Reaction get slow
Fiscal policy can react slowly to an economic environment. This is because the adjustment of fiscal policy in a government often means. Those multiple bodies make decisions using diverse political agendas and currents of economic thought. The debate that generated, in which many opinions on causes converge slows down. That allows the problem to worsen. The delay in action may also weaken the government’s effort to control economic problems. Since fiscal policy, arrangements take lengthier time to display positive economic change.
PRO: Control of exchange rate inflation
Fiscal policy is valuable to help development ratios in an economy. Inflation is the high price of goods and services in the absence of a boost in money in the economy. So consumers need to give extra money for goods and services with a little amount of money available. Government or its organization can undertake to scrap inflation with the use of fiscal policy to control the speed at which prices rise. A government can achieve this through the purchase of government securities. This is one of the merits of the fiscal policy.
CON: Forecast errors
Economists and administration finally assume the future situation of the economy. Establish a fiscal policy to match this statement. Every now and then, they just make mistakes. A government’s fiscal policy actually harms the economy. Most Americans used that motivation to pay off obtainable amount overdue instead of putting them into movement by buying goods and services. The result was a mitigated economic stimulus.
In conclusion, we can affirm that the government is the one that defines most of the destiny of the economy of a country. It must be cautious and analytical when choosing what to do to prolong and promote a relevant economic growth. And also its effects chart of accounts and finance organization also. Without neglecting the idea that monetary and fiscal policy complements each other. The results of these can only observe the medium and long-term. Monetary and fiscal actions must be coordinated to avoid adverse effects on the economic development. Its benefits and consequences must be borne in mind when making a decision.