Question

Qu vestion 46 Not yet Given our discussions regarding monetary and fiscal policy, explain at least two reasons why we may tend to favor monetary policy over fiscal policy? You must thoroughly explain intuitively and feel free to offer any graphical analysis if warranted Paints out of 5.00 Flag

Answer 1

Some of the advantages of monetary policy over fiscal policy are as follows:

1. National Debt - Fiscal policy involves borrowing money. As the government borrows money, the debt continues to grow. On the other hand, monetary policy does not add to the debt. Changing the level of interest rate by changing money supplied in the economy has no impact on national debt in the economy.

2. Crowding Out : In the case of fiscal policy when the government borrows money, it competes with businesses and consumers who also borrow money. The increased demand from the government for borrowed funds can raise interest rates and crowd out other who do not wish to pay such higher interest rates. Thus, overall investment spending in the economy falls.