Answer to Question #20218 in Macroeconomics for Jerry Hilla Djondo Kwadzo

Question #20218
Compare and contrast monetary and fiscal policies as tools for controlling output and inflation
Expert's answer
Fiscalpolicy and monetary policy are the two tools used by the State to achieve its macroeconomic objectives.While the main objective of fiscal policy is to increase the aggregate output
of the economy, the main objective of the monetary policies is to control the
interest and inflation rates. The celebrated IS/LM model is one of the models used to depict the effect of interaction on aggregate output
and interest rates. The fiscal policies have an impact on the goods market and
the monetary policies have an impact on the asset markets and since the two
markets are connected to each other via the two macro variables — output and
interest rates, the policies interact while influencing the output or the
interest rates.
There is a dilemma as to whether these two policies are complementary, or act as substitutes to each
other for achieving macroeconomic goals. Policy makers are viewed to interact
as strategic substitutes when one policy maker's expansionary (contractionary)
policies are countered by another policy maker's contractionary (expansionary)
policies. But so long as the objectives of one policy is not influenced by the other, there is no direct interaction between them.

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