What is the role of fiscal policy in managing inflation, and how does it differ from monetary policy?
Answer (1)
Fiscal policy and monetary policy are both tools the government uses to manage the economy, including inflation. However, they work in different ways and are controlled by different branches of the government.Fiscal PolicyFiscal policy refers to how the government spends money and collects taxes. When inflation is too high, the government can reduce its spending or increase taxes. These actions lower the total demand in the economy, which helps bring prices down.For example, if the government cuts back on infrastructure projects during high inflation, it reduces the number of jobs and money flowing into the economy. Less money means lower demand for goods and services, which helps control price increases. Similarly, raising taxes on luxury goods can reduce excessive spending.In the Philippines, during times of high food inflation, the government may also reduce import taxes on rice or pork to allow more supply in the market and lower prices. These are examples of targeted fiscal policies to ease inflation pressures on families.Monetary PolicyMonetary policy, on the other hand, is controlled by the Bangko Sentral ng Pilipinas (BSP). It focuses on managing the money supply and interest rates. The BSP raises interest rates to make borrowing more expensive, which slows down consumer spending and investment. This helps reduce inflation.The key difference is this: fiscal policy uses government spending and taxes, while monetary policy uses interest rates and money supply. Fiscal policy is often slower to implement because it needs legislation. Monetary policy can be changed more quickly by central bank decisions.To summarize, fiscal policy directly changes how much money the government puts into or takes out of the economy, while monetary policy controls how easy or hard it is to borrow and spend. Both aim to control inflation but use different tools to do so.
