3. Sequence of Presentation
Monetary & Fiscal Policies Defined
What do these aim at?
Tools of Monetary & Fiscal Policies
Kinds of policies to be pursued
The best policy, if any?
Policies pursued in Pakistan and their impact on
economy
4. Monetary Policy
Definition
The regulation of the money supply and interest
rates by a central bank, such as the State Bank in
Pakistan, in order to control inflation and stabilize
currency. Monetary policy is one of the two ways
the government can impact the economy. By
impacting the effective cost of money, the State
Bank can impact the business by creating Effective
Demand
5. Fiscal Policy
• Measures employed by governments to stabilize the
economy, specifically by adjusting the levels and
allocations of taxes and government expenditures. When
the economy is sluggish, the government may cut taxes,
leaving taxpayers with extra cash to spend and thereby
increasing levels of consumption. An increase in public-
works spending may likewise pump cash into the
economy, having an expansionary effect. Conversely, a
decrease in government spending or an increase in taxes
tends to cause the economy to contract
6. Fiscal Policy
• In economics, fiscal policy is the use of government
expenditure and revenue collection (taxation) to
influence the economy.
• Fiscal policy can be contrasted with the other main
type of macroeconomic policy, monetary policy,
which attempt to stabilize the economy by
controlling interest rates and the money supply.
7. What do these Policies aim at?
Both Monetary & Fiscal policies aim at Low
Inflation, Employment, Foreign Exchange
stabilityand Growth of national economy.
Monetary policies maintains balance in money
supply, thereby containing the inflation to a desired
level, whereas
Fiscal policies stimulate or regulate overall
economic activities as per national policies.
8. Objective of Monetary Policy
Monetary policy rests on the relationship between
the rates of interest in an economy, that is, the price
at which money can be borrowed, and the total
supply of money. Monetary policy uses a variety of
tools to control one or both of these, to influence
outcomes like economic growth, inflation, exchange
rates with other currencies and unemployment.
9. Tools of Monetary Policy
Major available tools are:-
Open Market Operations;
Reserve requirement;
Discount rates variation as a source of last
resort; and
Policy directives or administrative measures
10. Tools of Fiscal policy
The two main instruments of fiscal policy are :-
Government Expenditure & Taxation. Changes in
the level and composition of taxation and
government spending can impact on the following
variables in the economy:
• Effective Demand andthe level of economic
activity;
• The pattern of resource allocation;
• The distribution of income.
11. Kind of Policies to be pursued
There is no formulae or standard prescription
as to policy option.
Contractionary ( tight monetary policy) and
Expansionary (liberal monetary policy), or
Frequently adjustable policies or neutral
policies.
12. Do these policies succeed in isolation?
Monetary y & Fiscal policies produce desired
results only if these are in sync with each other.
For success of any Monetary policy,
independence of Central bank is a precondition.
Political expediencies of national government
may defeat the desired objective of both monetary as
well as fiscal policies.
Crowding out credit for private sector may
hamper the Effective Demand in the economy,
therefore may not create impetus to the economy.
13. The best policy, if any?
Suffice to say that only that policy or combination of
those policies which ensure sustained economic
growth & employment without increasing inflation
can be termed as successful policy (policies).
At times external shocks create insurmountable
pressures in effective implementation of sound
policies, this is more so in case of developing
economies.
14. Policies being pursued in Pakistan
In Pakistan Central Bank ( State Bank) never
enjoyed enough autonomy to pursue independent
Monetary Policies, resulting in partial success
whenever it targeted the inflation.
Unlike US, Pakistan has no legislative cap on
budget deficit, which allows free hand to disregard
deficit limits, conducive for growth.
Political expediencies, rather than prudent
economic policies regulate our decisions.
