Fiscal Policy: Definition, Strengths and Weaknesses
All inflationary processes in the economy require the state to pay close attention to them and to implement strategies for containing them right away. Each of the primary orientations in the theory of managing inflationary processes offers distinct causes and techniques for controlling inflation. In this particular situation, fiscal policy will be the most recent measure used to fight inflation.
Legislation’s fiscal strategy directly influences the creation of tax laws and, as a result, the level of taxes that people must pay. Since all fiscal policy tools have a multiplicative impact on the value of the equilibrium aggregate output, this effect is the strength of fiscal policy. The lack of a delay between the decision to alter budgetary policy and the emergence of the initial impacts of that change could also be an advantage of fiscal policy (Ridwan, 2022). The disadvantages of fiscal policy include the fact that any manipulation of budget expenditures eventually forms an influx of funds into the credit and financial sphere of relations.
Monetary Policy: Definition, Strengths and Weaknesses
Monetary policy is a set of government measures to manage financial flows in the country. The advantage of monetary policy is the absence of a displacement effect. Due to the reduction in the interest rate, investment is not being displaced but stimulated. There is also no gap between realizing the situation and making a decision because, in monetary policy, the decision to purchase securities by the Central Bank occurs quickly (Ridwan, 2022). Like any method of government regulation, economic policy has weaknesses, such as a high probability of inflation growth.
Preferred Policy Choice and Justification
As the actual policy selection is somewhat normative, fiscal policy is the one I would use. Its strengths are related to the fact that during the crisis state of the economy, an increase in demand during the recovery period can only cause an increase in the overall price level (Ridwan, 2022). In a state of full employment, the economy is at the limit of its production capabilities, and excess demand in these conditions causes demand inflation.
The weaknesses of my options are related to the fact that there is practically no one fiscal policy, but there is a complex of causes and interrelated factors. Therefore, the methods of combating the inflationary process are usually complex and constantly being refined and adjusted (Ridwan, 2022). If the totality of other methods on which fiscal policy closely depends is not coordinated, the impact of this policy will be too weak to reduce the inflation rate.
Macroeconomic Theory Supporting the Policy Choice
I used Keynes’ macroeconomics theory as a basis to develop my policy. It states that monetary policy instruments are practically useless in dealing with supply shocks. The inflation associated with them will weaken only after the correction of the causes that caused them, which is why it is advisable to use fiscal policy to combat inflation, which fights not with the consequences of inflation but with its original causes.
Reference
Ridwan, M. (2022). Determinants of inflation: Monetary and macroeconomic perspectives. Jurnal Manajemen Organisasi dan Industri, 1(1), 1–10.