Question

briefly describe the difference between Fiscal & Monetary policies. Next identify at least one fiscal and one monetary policy that was instituted in March 2020 in response to the COVID-19 crisis to help with economic recovery. Using the AD-AS model, explain how these policies were expected to work.

Answer 1

Answer - The fiscal policies are the policies to provide the monetary stability and are related to the spending and revenue of government whereas monetary policies are related to the changes in the money supply .

Fiscal policies are framed out by the government of the country and monetary policies are framed out by the central bank.

Fiscal policies may create the additional debt burden through borrowing for financing the spending. Monetary policies do not create additional debt burden.

One fiscal policy is the CARES act. This act aims to provide the $2.2 trillion assistance to the unemployed people and the small businesses who have suffered during the corona virus lockdown.

In the monetary policy , the interest rates have been lowered to as low as 0.25 %. This will help the small business to get the cheaper loans from the banks and thus increase the investment.

These policies were aimed to increase the falling aggregate demand in order to take the economy out of recession. With these policies , the AD curve will shift right and hence there will be rise in the price level and real GDP leading to economy growth. This can be seen in the below diagram -