Definition of Monetary Policy and Fiscal Policy

Definition Monetary Policy

Monetary policy is an attempt to control the macroeconomic situation in order to run in accordance with the desired through setting the amount of money circulating in the economy. Attempt was made to place price stability and inflation as well as an increase in output balance.

Setting the amount of money circulating in the community is set by adding or reducing the amount of money in circulation. Monetary policy can be classified into two, namely:

1. Expansive Monetary Policy

Is a policy in order to increase the amount of money circulation

2. Contractionary Monetary Policy

Is a policy in order to reduce the amount of money circulation. Also called a tight monetary policy (tight money policy).

Monetary policy can be done by running the monetary policy instruments, namely, among others:

1. Open Market Operation

Open market operations is a way of controlling the money supply by selling or buying of government securities (government securities). If you want to increase the money supply, the government will buy government securities. However, if you want the amount of money in circulation decreases, then the government will sell government securities to the public. Government securities, among others, including the Certificate of National Bank and Money Market Securities.

2. Discount Rate

Discount facility is setting the amount of money in circulation to play a central bank interest rates on commercial bank. Banks sometimes have a shortage of money so it must borrow to the central bank. To make the amount of money increases, the government lowered the interest rate the central bank, raised interest rates and vice versa for the sake of making money in circulation decreases.

3. Reserve Requirement Ratio

Reserve Requirement Ratio was set amount of money in circulation by playing a number of banking reserve fund that must be kept on the government. To increase the amount of money, the government lowered the Reserve Requirement Ratio. To reduce the money supply, the government raised the ratio.

4. Moral Persuasion

Moral Persuasion is monetary policy to regulate the money supply by giving the appeal to economic actors. Examples such as banks urged lenders to be cautious in issuing loans to reduce the money supply and call for banks to borrow more money to the central bank to expand the money supply in the economy.

Definition of Fiscal Policy

Fiscal policy is an economic policy in order to direct the economy to get better by changing the way government revenues and expenditures. This policy is similar to the monetary policy to regulate the money supply, but fiscal policy is more in setting revenue and government spending.

Fiscal policy instrument of government revenues and expenditures are closely linked to tax. From the tax side is clear if changing the tax rates will affect the economy. If the tax lowered then public purchasing power will increase and industry will be able to increase the amount of output. And vice versa tax increases will reduce purchasing power and lower industrial output in general.

Budget Policy / Political Budget:

1. Budget Deficit / Fiscal Policy Expansive

The budget deficit is government policy to make countries expenditures greater than income to provide stimulus to the economy. Generally very good to use if economy condition is recessive.

2. Budget Surplus / contractionary fiscal policy

The budget surplus is government policy to create greater revenues than expenses. The good political budget surpluses when the economy performed on the condition that the expansion of red-hot (overheating) to reduce demand pressures.

3. Balanced Budget

Balanced budget occurs when the government sets as large as the revenue expenditure. Political goal of a balanced budget is the budget certainty and improve discipline.

Related Post :