Question

How can the government use monetary policy and fiscal policy to reduce the effects of an economic crisis?...


How can the government use monetary policy and fiscal policy to reduce the effects of an economic crisis?

Answer

Monetary policy means the policy taken by the central bank to control the supply of money. And also to achieve the sustainable and balanced economic growth of the country. Fiscal policy is used by the government to control the economy by changing tax rates and the expenditures of the government.

During the time of recession, the monetary policy and the fiscal policies can be adopted by the government. The impact of economic crisis is reduced by the government by using fiscal policy or monetary policy. These two policies are helpful in the recession period.

The central bank follows and implements the fiscal as well as monetary policies. The monetary policy is implemented by increasing the level of loans and money supply and decreasing the interest rates. When interest rates are low, the consumers will not buy big things like house or vehicle. And the companies also will reduce the investment.

When there is a fiscal policy implemented, the tax rates will be reduced. When the tax rates come down, the demand will increase. So the economy will grow.  And the government expenditures also will be reduced. The business cycle can be balanced by following fiscal policy.

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