Monetary, Fiscal and Exchange Rate Policy
A study of the connection between monetary policy, fiscal policy, and the exchange rate policy.
This paper explains monetary, fiscal and exchange rate policies separately, with definitions by different economists to balance the arguments. It is then followed by a discussion of their connection to each other, involving issues such as GDP, government expenditure, and interest rates.
“McDonald states monetary policy is the government’s policy on setting the level of the money supply (1996: 149). It is the Reserve Bank of Australia (RBA)’s attempt to change the quantity of money and interest rates so as to affect aggregate demand and, ultimately, equilibrium real GDP and the price level. Monetary policy, fiscal policy and the exchange rate policy are used by the RBA and by the Treasury to moderate fluctuations in a country’s economic growth rate and to maintain an appropriate trend growth rate. In today’s world of floating exchange rates, it can be demonstrated that monetary policy is more effective at controlling macroeconomic conditions than fiscal policy is.”
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