Monetary Policy is the process undertaking by monetary authority of concerned country to control the supply of money, usually targeting a rate of interest. Generally Monetary Policy exercised to achieve a set of goals towards the growth as well as stability of economy. Normally these objective or goals contains reduction of unemployment and stability of prices. Monetary theory provides way to make best monetary policy.
Monetary policy can be either an expansionary policy, or a contractionary policy. Where an economy increase the total supply of money rapidly is said to be Expansionary Policy and when an economy decrease the total supply of money or increase it unhurriedly it is called contractionary Policy. Expansionary Policy generally used to overcome unemployment in the recession by decreasing the interest rate. Where as the Contractionary Policy is used to meet the inflation by increasing the rate of interest.
Monetary Policy rests on the association of rates of interest in an economy. The money can be borrowed and can supply on this price. Monetary policy is a tool to have power over inflation, exchange rate with foreign currencies, economy growth and unemployment.
The most important thing which policymakers should follow is to make a reliable policy and denounce interest rate targets because they are not much important in respect of monetary policy. If an employee thinks the price to be higher in future then he/she would create a contract with higher wages to meet this high price. So the belief of lesser wages indicates wages-setting behavior among personnel and owners. And while wages and lesser there can not be demand-pull inflation as employees are getting a minor wage and there will no cost-push inflation as employer are playing not much money in wages.
Fiscal policy is exercised for Govt. expenditure and to collect revenue to control the economy. Fiscal Policy is deferent from other major Policies like macroeconomic Policy and monetary policy which are used to control the economy by the help of interest rate and supply of money. Main tools of fiscal policy are expenditure of government and taxation. Transformation in the level and compiling of taxation and government payments can affect the variables in an economy like cumulative demand and economic activity levels, pattern of resource allocation, income distribution.
There are three view of fiscal policy, neutral, expansionary and contractionary. These all are defined as under;
• A neutral view point of a fiscal policy means a balanced economy. This includes the larger tax revenue, Govt. expenses are totally supported by tax revenue and overall budget result neutrally affects the level of economy.
• An expansionary view point of fiscal policy contains a larger government spending than tax revenues.
• In a situation when Govt. spending is lesser than tax revenues is called Contractionary fiscal policy.