Fiscal and monetary policy theories and application Essay

Fiscal and monetary policy theories and application - Essay Example Fiscal policy entails the processes through which the government achieves major economic goals through taxes and government spending. The government collects tax and spends it to achieve economic development. Taxation is one of the key avenues though which governments collect revenues from local and foreign residents. Three main aspects that make up fiscal policy include consumption, investment and government spending. In this sense, the government relies on the three aspects of demand to achieve desired economic goals. The desired economic goals include full employment, price stability, economic growth, and maintenance of a favorable balance of payment, The three aspects add up to determine the equilibrium level of the gross domestic product. On the other hand, monetary policies refer to the manipulations of interest rates and money supply to achieve various economic ends. The economic ends are similar in the sense that they entail full employment, economic growth, price stability, and a favorable balance of payment. This suggests that the fiscal policies and the monetary policies possess the same goals. In the regulation of the money in circulation, central bank adjusts the interest rate that entails the price of borrowing money. In the history of economics, different schools of thought vouch for different policies. The fiscalists rely on the Keynesian school of thought in stabilizing the economy. This school of thought believes that fiscal policies are the only effective measure of instigating economic growth during a period of recession in a country. In turn, monetary policies are ineffective in stirring economic growth during a recession in a country.