Fiscal policy & Monetary Policy

Fiscal policy
Fiscal policy is the means by which a government adjusts its
spending levels and tax rates to monitor and influence a
nation's economy. It is the sister strategy to monetary policy
through which a central bank influences a nation's money
supply. These two policies are used in various combinations
to direct a country's economic goals. Here's a look at how
fiscal policy works, how it must be monitored, and how its
implementation may affect different people in an economy.
Before the Great Depression, which lasted from October 29,
1929, to the onset of America's entry into World War II, the
government's approach to the economy was laissez-faire.
Following World War II, it was determined that the
government had to take a proactive role in the economy to
regulate unemployment, business cycles, inflation, and the
cost of money. By using a mix of monetary and fiscal
policies (depending on the political orientations and the
philosophies of those in power at a particular time, one
policy may dominate over another), governments can control
economic phenomena.
How Fiscal Policy Works
Fiscal policy is based on the theories of British
economist John Maynard Keynes. Also known as Keynesian
economics, this theory basically states that governments can
influence macroeconomic productivity levels by increasing
or decreasing tax levels and public spending. This influence,
in turn, curbs inflation (generally considered to be healthy
when between 2% and 3%), increases employment, and
maintains a healthy value of money. Fiscal policy plays
a very important role in managing a country's economy. For
example, in 2012 many worried that the fiscal cliff, a
simultaneous increase in tax rates and cuts in government
spending set to occur in January 2013, would send the U.S.
economy back into recession. The U.S. Congress avoided
this problem by passing the American Taxpayer Relief Act
of 2012 on Jan. 1, 2013.
Balancing Act
The idea is to find a balance between tax rates and public
spending. For example, stimulating a stagnant economy by
increasing spending or lowering taxes, also known as
expansionary fiscal policy, runs the risk of causing inflation
to rise. This is because an increase in the amount of money in
the economy, followed by an increase in consumer demand,
can result in a decrease in the value of money—meaning that
it would take more money to buy something that has not
changed in value.
Let's say that an economy has slowed down. Unemployment
levels are up, consumer spending is down, and businesses are
not making substantial profits. A government may decide to
fuel the economy's engine by decreasing taxation, which
gives consumers more spending money while increasing
government spending in the form of buying services from the
market (such as building roads or schools). By paying for
such services, the government creates jobs and wages that
are in turn pumped into the economy. Pumping money into
the economy by decreasing taxation and increasing
government spending is also known as "pump priming." In
the meantime, overall unemployment levels will fall.
With more money in the economy and less taxes to pay,
consumer demand for goods and services increases. This, in
turn, rekindles businesses and turns the cycle around from
stagnant to active.

Monetary Policy
Monetary policy, the demand side of economic policy, refers
to the actions undertaken by a nation's central bank to control
money supply to achieve macroeconomic goals that promote
sustainable economic growth.
Understanding Monetary Policy
Monetary policy consists of the process of drafting,
announcing, and implementing the plan of actions taken by
the central bank, currency board, or other competent
monetary authority of a country that controls the quantity of
money in an economy and the channels by which new money
is supplied. Monetary policy consists of management
of money supply and interest rates, aimed at achieving
macroeconomic objectives such as controlling inflation,
consumption, growth, and liquidity. These are achieved by
actions such as modifying the interest rate, buying or
selling government bonds, regulating foreign exchange rates,
and changing the amount of money banks are required to
maintain as reserves.
Economists, analysts, investors, and financial experts across
the globe eagerly await the monetary policy reports and
outcome of the meetings involving monetary policy decision-
making. Such developments have a long lasting impact on
the overall economy, as well as on specific industry sector or
market.
Monetary policy is formulated based on inputs gathered from
a variety of sources. For instance, the monetary authority
may look at macroeconomic numbers like GDP and inflation,
industry/sector-specific growth rates and associated figures,
geopolitical developments in the international markets (like
oil embargo or trade tariffs), concerns raised by groups
representing industries and businesses, survey results from
organizations of repute, and inputs from the government and
other credible sources.
Monetary authorities are typically given policy mandates, to
achieve stable rise in gross domestic product (GDP),
maintain low rates of unemployment, and maintain foreign
exchange and inflation rates in a predictable range. Monetary
policy can be used in combination with or as an alternative
to fiscal policy, which uses taxes, government borrowing,
and spending to manage the economy.
The Federal Reserve Bank is in charge of monetary policy in
the United States. The Federal Reserve has what is
commonly referred to as a "dual mandate": to achieve
maximum employment while keeping inflation in check.
Simply put, it is the Fed's responsibility to balance economic
growth and inflation. In addition, it aims to keep long-term
interest rates relatively low. Its core role is to be the lender of
last resort, providing banks with liquidity and serve as a bank
regulator, in order to prevent the bank failures and panics in
the financial services sector.
 Main Issues of Pakistan Economy

Pakistan has been facing different challenges regarding its

economy. The economic situation of Pakistan is very
critical and people are looking towards the solution of these
challenges. Pakistan has different opportunities which can
help it to solve its economic problem. But without tackling
long term challenges and problems decisively, the country
will no longer be able to take advantages of opportunities.
Increase in debt and import and decrease in export, saving,
investment, tax collection and lack of policy
implementation, excessive taxation are some of the
challenges faced by Pakistan’s economy.

Decentralization

Decentralization is one of the factors which can help

increase the economy of the country. Local government
should report to the provincial government about its
activities and the provincial government should report to
the federal government. If our government does this, we
can do more by the same resources which are being wasted
today by its direct involvement.

Interest rate
Interest rate is one of the factors which can increase the
economy of the country. The government can offer low-
interest rate to the public so that it becomes easier for the
investors to borrow money from the banks and invest it in
their business. Borrowing at a low-interest rate and
investing money will increase the level of demand in the
economy. It will increase the demand for the labor force to
meet the high production level. GDP and living standard of
people will improve.
Tax collection
Tax collection can play a vital role to improve the economy
of Pakistan. The government should allow the Federal
Board of Revenue (FBR) to work impartially,
independently and transparently which will make FBR an
efficient and effective tax administration. This will increase
the confidence of taxpayers in FBR and increase tax
collection in a fair manner. This higher collection of tax
can be used for the development of infrastructure. It will
help to create jobs by reducing unemployment and generate
income for the millions.
While there is a crucial need to fix persistent challenges,
more innate reforms are required to improve and attract
talent to serve in the businesses and public sector. Instead
of politicians, the academics, intellectuals and community
leaders should come forward and play their role in social
revolution.