Fortunately, contractionary monetary policy is effective in preventing inflation. Tools of Fiscal Policy The first tool is taxation. That includes income, capital gains from investments, property, sales or just about anything else. Taxes provide the major revenue source that funds the government. The downside of taxes is that whatever or whoever is taxed has less income to spend on themselves.
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
The use of a Monetary Policy: The use of monetary policy tried to control the availability and use of credit. This type of policy is used by the Central bank to reduce lending by commercial banks. Thereby reducing the amount of money in circulation. A monetary policy reduces the supply of money involves the use of open market operations (OMO). Increasing the cash-deposit ratio, the use of special deposits, use of directives, moral Suasion and funding.
These studies find that monetary policies play a significant role in controlling house prices or house price bubbles. Maclennan et al. (2000) find that monetary policy may be transmitted through the housing market. The main direct effect is an income or cash flow effect: when the interest rate rises, the interest burden of any outstanding debt rises and after-housing-costs disposable income falls. Xu and Chen (2012) find that China monetary policy actions are the key driving forces behind the change of real estate price growth in China.
The impact of taxes and public spending on economic growth has become a subject of much discussion and debate among economists. This is partly because there are many theories regarding what propels and facilitates economic growth: while some favour the Keynesian demand side factors, others Neo-classical supply side factors, while yet others consider a mixture of the two or another theory altogether. However, the world economy is sufficiently large and complex enough so that any theory can find some support in the data. By implementing changes in tax rates and public spending, the government can influence the economy, through what is popularly known as fiscal policy. There are strong proponents as well as opponents for cutting taxes and public spending.
Monetary policy is enacted by a central bank that controls money supply that is circulating in the economy. This money supply influences inflation and interest rates that determine consumption level, employment rate and cost of debt. Expansionary monetary policy involves in buying treasury notes and declining interest rates on loans of central banks. These actions help in making the money supply to increase and making interest rates lower. This policy also makes consumption to be more attractive corresponding to savings.
It influences on aggregate demand directly (Fundamentalfinance). There are various kinds of fiscal policy, however, in this paper will mention only two types of them. First is a tariff or import fees. Tariff is imposed to assist domestic entrepreneurs, so it impacts on the consumers as they have to spend much money on the imported goods (About). Another fiscal policy is subsidy.
But when interest rates are at almost zero, central banks need to adopt different methods - such as pumping money directly into the financial system. This process is known as Quantitative easing (QE). To stimulate the economy, central banks use a this monetary policy, usually when standard monetary policy has
On the other hand, CB implements contractionary monetary policy by decreasing the money supply through OMO. There are three tools that central bank can use to implement monetary policy. Firstly, OMO represent purchase and sale of bonds by the central bank. When the central bank buys bonds, it increases quantity of reserves in the banking systems. Banks issue loans and create deposits when they have a larger quantity of reserves.
The purpose of quantitative easing is to push up the economic growth by lowering the interest rate. The central banks has its unique function to create the money. (eco.com). By increasing the money supply, it will keep the value of dollar low. With a low interest rate, it permits banks to make more loans.