Monetary and Fiscal Policy Essay examples

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Monetary and fiscal policy and their applications to the third world countries with a huge informal sector This essay seeks to explain what are monetary and fiscal policy and their roles and contribution to the economy. This includes the role of the government in regulating the economical performance of a country. It also explains the different features and tools of monetary and fiscal policy and their performance when applied to the third world countries with a huge informal sector. Monetary Policy Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) taking up measures to regulate the supply of money and the rates of interest. It involves controlling money in the economy to promote economic…show more content…
This involves buying or selling financial instruments like bonds in exchange of money to be deposited with the central bank. By selling the financial instruments, the central bank mops up the cash in circulation. On the other hand, selling injects money thus increasing the supply of money (Bernanke 2006). Interest rates By increasing or reducing the nominal interest rates, the money supply is either increased or reduced. When the rate goes up, people are not able to borrow, thus the money does not enter into circulation. But when the rates go down, people borrow in big numbers therefore increasing the money supply. So the monetary authority just needs to adjust the interest rates either upwards or downwards, and in-direct results will be reflected on the money on circulation. Discount window lending This is the situation where the commercial banks and other lending institutions borrow from the central bank at lower interest rates compared to how they will lend. This gives the institution a chance to vary credit conditions depending on the central bank lending rates. If the central bank raises its lending rates, then the other lending institutions will have to raise their rates too, thus discouraging the public from borrowing. But if the central bank lowers its rate, then commercial banks and other institutions will be forced to lower their rates too. This will encourage the

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