a. How do the changes in monetary and fiscal policy instruments affect you perso

Question

a. How do the changes in monetary and fiscal policy instruments affect you personally or work wise? Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. Why is it difficult for policymakers to choose the appropriate strength of their actions? Which method do you think is better in the long run? why?

b. Some economists and policymakers argue in favor of repalcing the current income tax in the USA with consumption tax. What are your opinions on the issue? How do you think such change impacts your income and expenditure pattern? Which tax method do you prefer income tax or consumption tax? why? What are the pros and cons of the two tax methods?

Explanation / Answer

(a)

The changes in monetary policy and fiscal policy affects the common man in many ways. the monetary policy basically relates to the changes in the bank rate, repo rate reverse repo rate, statutory liquidity ratio (SLR), Cash reserve ratios. The changes in these ratios affect the money supply in the market. For instance say an increase in the SLR would mean that commercial banks will now have to keep more money in the form of cash or liquid assets, thereby affecting the lending capacity of the banks. This will therefore reduce the funds available for individuals as well as corporates. The commercial banks consequent upon the changes or say an increase in the bank rate would increase the rate of interest on personal loans, corporate loans, educational loans and other short and long term credit in the economy which would certainly affect a person professionally and personally. On the other hand fiscal policy relates to the changes in public expenditure policies and tax policies in the economy. Change or say increase in the govt capital and other expenditure in the market would increase the money supply in the economy and thereby incomes of the individuals. Similarly imposition of a new tax would reduce the disposable income of the individuals, thereby affecting the whole population of economy, personally and professionally.

Many a times it is difficult for policy makers to chose the strengnth of their actions due

1. Leakage of money from the market e.g. idle cash holdings by the people

2. Lack of commitment by the commercial banks to cooperate with the central bank as their main and most important aim is to earn more and more interest by maximizing lending capacity even if they are advised against it by the central banks in special circumstances.

3. Low confidence levels of investors and the consumers in the economy.

4. Difference in tastes and preferences of individuals in the economy.

A proper mix of both the policcies is strongly recommended to stabilize the economy in the long run. Depending on a single measure would not yield the best possible results for the economy. For instance, to increase the money supply in the economy in deflationary stages, the central bank should increase the public expenditure as well as reduce different rates in the monetary policy to make its actions effective.

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