Angel Kyle Delos Angeles
BSA 2-A
CODE: (3007)
Monetary policy is a set of tools used by a nation's central bank to control the overall money
supply and promote economic growth and employ strategies such as revising interest rates and
changing bank reserve requirements. The contribution that monetary policy makes to sustainable
growth is the maintenance of price stability. Since sustained increase in price levels is adjudged
substantially to be a monetary phenomenon, monetary policy uses its tools to effectively check
money supply with a view to maintaining price stability in the medium to long term. Theory and
empirical evidence in the literature suggest that sustainable long-term growth is associated with
lower price levels. In other words, high inflation is damaging to long-run economic performance
and welfare. Monetary policy has far reaching impact on financing conditions in the economy, not
just the costs, but also the availability of credit, banks’ willingness to assume specific risks, etc. It
also influences expectations about the future direction of economic activity and inflation, thus
affecting the prices of goods, asset prices, exchange rates as well as consumption and investment.
A monetary policy decision that cuts interest rate, for example, lowers the cost of borrowing,
resulting in higher investment activity and the purchase of consumer durables. The expectation
that economic activity will strengthen may also prompt banks to ease lending policy, which in turn
enables business and households to boost spending. In a low interest-rate regime, stocks become
more attractive to buy, raising households’ financial assets. This may also contribute to higher
consumer spending, and makes companies’ investment projects more attractive. Low interest rates
also tend to cause currency to depreciate because the demand for domestic goods rises when
imported goods become more expensive. The combination of these factors raises output and
employment as well as investment and consumer spending then therefore contributing to the
economic growth and development.
https://www.cbn.gov.ng/out/eduseries/series11.pdf
https://www.investopedia.com/terms/m/monetarypolicy.asp
Fiscal policy refers to the use of government spending and tax policies to influence economic
conditions, especially macroeconomic conditions. Central banks influence the money supply
indirectly through adjusting interest rates, bank reserve requirements, and the acquisition and sale
of government securities and foreign exchange. Governments have an impact on the economy by
altering the level and composition of taxes, the extent and composition of spending, and the
degree and form of borrowing. By adjusting its level of spending and tax revenue, the government
affect the economy by either increasing or decreasing economic activity in the short term.
The most immediate impact of fiscal policy is on aggregate demand for goods and services. A
fiscal expansion, for example, increases aggregate demand in one of two ways. First, if the
government increases its purchases while keeping taxes constant, it directly stimulates demand.
Second, if the government lowers taxes or raises transfer payments, households' disposable
income grows, and they spend more. This increase in consumption will raise aggregate demand.
Fiscal policy affects the composition of aggregate demand as well. When the government runs a
deficit, it uses BONDS to cover some of its expenses. In doing so, it competes with private
borrowers for savings loans. Holding all else equal, a fiscal expansion will boost INTEREST
RATES and "crowd out" some private INVESTMENT, lowering the proportion of production
made up of private investment. Fiscal policy influences the exchange rate and the trade balance
in an open economy. The rise in interest rates caused by government borrowing draws foreign
money during a fiscal expansion. Foreigners bid up the price of the dollar in order to obtain more
dollars to invest, generating an exchange-rate rise in the near run. This appreciation makes
imported items cheaper in the US and exports more expensive abroad, causing the merchandise
trade balance to fall.
https://www.investopedia.com/terms/f/fiscalpolicy.asp
https://crsreports.congress.gov/product/pdf/R/R45723/1#:~:text=Fiscal%20policy%20is%20the%20me
ans,activity%20in%20the%20short%20term.
https://www.econlib.org/library/Enc/FiscalPolicy.html