Compare and contrast fiscal and monetary policy. How would each of these polices handle severe inflation?
September 25, 2008
RJ asked:
Which policy is more effective? Why?
Which policy is more effective? Why?
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September 28th, 2008 at 11:28 am
In case of severe inlfation fiscal policy is very limited as company see their profit/earnings being squeeze by higher cost (labor + materail + energy) while not being always able to pass on the increase to consumers. Lots of companies might have negative earnings and therefore changing tax rate (fiscal policy) will only have a limited impact.
Monetray policy is much more efficient by increase borrowing rate to slow down the economy and force price decreases and by devaluating currencies to be realigned with the inflation.