The Government can regulate the economy through monetary and fiscal policies.
Monetary Policy
The supply of money is controlled by Government through monetary policy. The monetary policies are generally done by the central banks ( RBI in India). The interest rates and circulation of money is controlled by the central banks through monetary policy.
The central banks according to the macro economic situation take stance needed for the nation. At times, the priority may be inflation control and at times, the priority may be growth.
eg: The higher interest rate will reduce the money in circulation and bring down inflation. At the same time, the growth may reduce.
Fiscal Policy
The composition of spending and amount of spending showcases areas where the government wants to spend money. The fiscal policies is the way govt spends money according to its priorities.
The taxes government imposes and the incentives given for various sectors highlight the way government wants to spend money. If there is slowing of economy, the government may decide to spend more to stimulate economy. Eg: - Heavy investments in infrastructure will improve employment, push more money to core sectors, which in-turn may stimulate growth.
Monetary Policy
The supply of money is controlled by Government through monetary policy. The monetary policies are generally done by the central banks ( RBI in India). The interest rates and circulation of money is controlled by the central banks through monetary policy.
The central banks according to the macro economic situation take stance needed for the nation. At times, the priority may be inflation control and at times, the priority may be growth.
eg: The higher interest rate will reduce the money in circulation and bring down inflation. At the same time, the growth may reduce.
Fiscal Policy
The composition of spending and amount of spending showcases areas where the government wants to spend money. The fiscal policies is the way govt spends money according to its priorities.
The taxes government imposes and the incentives given for various sectors highlight the way government wants to spend money. If there is slowing of economy, the government may decide to spend more to stimulate economy. Eg: - Heavy investments in infrastructure will improve employment, push more money to core sectors, which in-turn may stimulate growth.
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