Neither monetary policy nor fiscal policy alone can be effec

\"Neither monetary policy nor fiscal policy alone can be effective in formulating sound economic policies for recession.\" Do you agree or disagree? Share your thoughts.

Solution

I agree with this statement.

Monetary and fiscal policy has to move synchronously and in tandem, in order to make the economic policy effective. During economic boom, there is excess supply of money in the economy which raises inflation rate. To tame inflation, Central Bank lowers money supply using monetary policy tools. But if, at the same time, Government uses an expansionary fiscal policy (for example, lower tax rate) which increases money supply and raises aggregate demand, both fiscal and monetary policy will be nullified by setting off each other’s effects.

Therefore, an expansionary (contractionary) monetary policy should not be accompanied by an expansionary (contractionary) fiscal policy, under normal circumstances.