Paper on Fiscal and Monetary Policies on Fixed and Floating Exchange Rates

Both the fiscal and monetary policies have a significant impact on the development of a country since the techniques affect people’s disposable incomes. Notably, fiscal laws are fundamental in the growth of an economy since the government’s capability to tax and spend influences the overall wellbeing of the business sector. Equally, monetary policies exert a substantial effect on commercial activities because unforeseen changes in the stock of currency affect output and growth. As such, to enhance sufficient progress in an economy, there must be unpredictable rise in the stock money. Similarly, extensive spending by the government is stipulated to cause a crowd in the private sector thereby, can have a considerable effect on the expansionary fiscal policy (Han 111). The fixed regime entails a commitment to ensure the nominal exchange charges remains at a given level mostly through the purchases and sales of international currencies by the central bank. Lastly, the floating system mentions that when there is no market interference by monetary specialists an exchange rate moves towards the market forces leading to a state of equilibrium.

Effects of fiscal and monetary policies under both fixed and Floating Exchange Rates

Impacts of Fiscal and Monetary Policies under Fixed Exchange Rate

Fiscal and monetary policies are some of the techniques used by governments to guide the macroeconomics of a country and control inflation. As such, integrating fiscal frameworks by relevant authorities have a significant positive influence on output, consumption, and employment based on the old Keynesian view.  Equally, fiscal rules have a stabilizing role in the commercial sphere as it helps in running countercyclical primary debits (Tevdovski, Goran and Jane 4). Notably, a shift in any government spending such as transfer payments or taxes by the federal or the local authorities is bound to have a substantial change on the fiscal policy. However, the expansionary fiscal rule is achieved through an increase in government expenditure whereas; minimal fiscal frameworks is attained based on a reduction in government transfer payments.

As such, the occurrence of fiscal expansion frameworks based on an upsurge in government expenditure leads to an increase in the state demand for products and services. Similarly, a rise in the transfer expenses and a reduction in taxes cause the disposable income to accelerate thereby, making the need for consumption to escalate. Therefore, fiscal policies under fixed exchange rates lead to an increase in the aggregate demand which is an essential factor in the expansion of the Gross National Product (GNP) (Han 112). Notably, the monetary guidelines aim at regulating the amount of currency in an economy primarily to help attain price stability and full-employment equilibrium. However, an increase in government spending and lowered taxes promotes upsurge in the aggregate demand. An upscale in the money supply leads to a decrease in the interest rates which eventually causes a reduction in the level of a nation’s return (Han 112). Similarly, contractionary monetary policies indicate a decrease in the supply of money within the economy making the demand for materials to decline.

Impacts of Fiscal and Monetary Policies under Floating Exchange Rate

An upsurge in the money supply causes the real money supply to exceed the real money demand in an economy because numerous families and enterprises save more money than they could spend. As such, the process leads to a rise in the supply of long-term deposits and the overall amount of funds available for commercial entities to offer as loans. Equally, more money to lend has a significant influence on the interest rates since the action results in a decreased level of return in the forex market (Onder, Kursat and Villamizar-Villegas 160). An increase in government expenditure due to the expansionary fiscal policies promotes a rise in the government’s demand for goods and services. The occurrence of expansionary financial frameworks based on an upscale in the transfer payments causes the population consumption demand to increase, thus, enhancing the development of GNP. Therefore, to avert any decline in the GNP margin, industries are advised to produce more because an increase in the supply facilitates growth in the GNP. Additionally, the continued increase in the GNP due to excessive aggregate demand results in the rise of interest charges and income rates.

Strength and Weakness of Fiscal versus Monetary Policy under Each Exchange Rate

Both the fiscal and monetary policies can be used to help maintain positive economic development, achieve full employment, and to ensure that the level of inflation remains low. Notably, the primary objective of using the fiscal and monetary frameworks in a country is to minimize the cyclical variations in the economic cycles (Pettinger n.p). Previously, relevant authorities depended on financial guidelines to attain low inflation. However, the use of commercial laws has been agitated for by various specialists to help protect a nation during recession periods.

Strength and Weaknesses of Fiscal vs. Monetary under Fixed and Floating Exchange Rate

The primary advantage of the monetary policy is its ability to control inflation rates in a country successfully. However, a small level of inflation is significant for economic growth since the process facilitates future investments and enable employees to expect higher earnings. Low rates in a monetary framework promote over-borrowing which can result in hyperinflation, hence, impacting the economic developments (Pettinger n.p). The primary strength of the fiscal guidelines includes the ability to direct expenditure on specific projects mainly to accelerate economic expansion. Notably, the use of a fiscal framework can create a budget deficit which can negatively impact the economic progression. In a floating exchange rate, the fiscal guidelines have a strong impact on capital mobility but are less effective as that of small open markets.

Conclusion

Both the fiscal and monetary frameworks have a substantial effect on the economic growth of a nation since the techniques tend to affect people’s disposable incomes. Therefore, to facilitate sufficient progress in an economy, there must be an unpredictable rise in the stock money. Equally, significant expenditure by the government is stipulated to cause a crowd in the private sector; hence, can have a considerable impact on the expansionary fiscal policy. Notably, incorporating fiscal policies by relevant authorities have a positive influence on output, consumption, and employment based on the old Keynesian model. Equally, fiscal policies under fixed exchange rates lead to an increase in the aggregate demand which is an essential factor in the expansion of the Gross National Product (GNP). An upscale in the money supply leads to a decrease in the interest rates which eventually causes a reduction in the level of a nation’s return. The primary strength of the fiscal guidelines includes the ability to direct expenditure on specific projects mainly to accelerate economic expansion.

 

 

 

 

 

Works Cited

Han, Ping. “Effects of Fiscal Policy under Different Capital Mobility”. Accounting and Finance Research, Vol. 3, No. 1, 2014, pp. 111-115., doi:10.5430/afr.v3n1p111. Accessed 10 Mar 2019.

Onder, Yasin Kursat, and Mauricio Villamizar-Villegas. “The Effects of Monetary and Exchange Rate Policy Shocks: Evidence from an Emerging Market Economy.” International Journal of Central Banking Vol. 14, No.1, 2018, Pp. 159-199.

Pettinger, Tejvan. “Monetary Policy vs. Fiscal Policy”. Https://Www.Economicshelp.Org/Blog/2253/Economics/Monetary-Policy-Vs-Fiscal-Policy/, 2018, https://www.economicshelp.org/blog/2253/economics/monetary-policy-vs-fiscal-policy/. Accessed 10 Mar 2019.

Tevdovski, Dragan, Goran Petrevski, and Jane Bogoev. “The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis.” (2016).