Monetary Policy Management

Report on

Policy debate

Date: January 14, 2010

Author

Ahmad Sajjad Shabbir

MS Banking & Finance
PGD Islamic Finance
Abstract

A policy is typically described as a purposeful plan of action to guide decisions and achieve sensible (rational)
outcomes. In this report I will take a brief overview of monetary and fiscal policies, views of Keynes and
Monetarists on policy and different other economist’s debate on this that whether policy should be active or
passive and if active then would it be conducted by rule & law or by giving discretionary powers.

I will mainly study the debate of Keynes and Monetarists about policies and secondly I will study the
arguments in favor of active & passive policy and try to conclude at the end of this report if policy should be
active then by which way we implement it and if passive then what are the reasons behind this.
Table of contents

What is policy? 3
What is stabilization policy? 3
 Monetary policy
 Fiscal policy
Keynes VS Monetarists 4
 Keynes view point
 Monetarist view point
Role of fiscal and monetary policy in Keynes view 5
 Keynes real sector & monetary sector
 Weakness in monetary policy
Role of fiscal and monetary policy in Monetarists view 10
 Monetarist real sector & monetary sector
 Weakness in fiscal policy
The macro economic policy debate 13
Whether a policy be active or passive? 13
Keynes and Monetarists views about policy 13
Lags in the implementation and effects of policies 14
 Time lags
 Inside lags
 Outside lags
 The difficult job of economic forecasting
 Ignorance expectations and Lucas critique
Should policies be conducted by rule or by discretion? 17
Distrust of policy makers & Political process 18
Discretionary policy time inconsistency 18
Rules for monetary & fiscal policies 19
Arguments in the favor of Rules and discretionary policy 20
Conclusion 20
Bibliography 22
1 What is policy?

A policy is typically described as a purposeful plan of action to guide decisions and achieve sensible (rational)
outcome(s).

A macroeconomic strategy implemented by governments and central banks to keep economic growth, price
levels and unemployment stable.
Mainly there are two policies that are use to manage the economy those are:

1. Monetary policy
2. Fiscal policy

Now we will discuss briefly explain both of these policies with there objectives and tools then we will go into
this debate whether policy should be active or passive.

1.1 Monetary policy

Policy that is used to manage

1. The supply of money

2. Availability of money
3. Cost of money

In any country is called monetary policy. This policy is controlled and implemented by the central bank of
that country like in case of Pakistan monetary policy controlled and manage by state bank of Pakistan

1.2 Monetary policy management

The management of expansation and contraction of the MS for the purpose of attaining one or more
objectives; such as for full employment and control inflation

2 Tools of monetary policy

1. Open market operation
2. Bank rate
3. Reserve ratio
2.1 Open market operation

The sale and purchase of government approved securities in the open market by the state bank is called the
open market operation.

2.2 Bank rate

The discount rate fixed by a central bank

2.3 Cash reserve ratio

It is the minimum cash reserve ratio that the commercial bank has to keep with the State bank

3 Monetary policy objectives

1. Exchange Stability
2. Full Employment
3. Economic Growth

4 Fiscal policy

The policy that is concerned with the revenue and expenditure of the Government, fiscal policy is
implemented by the Government of the country it deals with the taxation and borrowing of money.

4.1 Some objectives of Fiscal Policy

1. Mobilization of resources
2. Accelerate the economic growth like directing the resources to the right channels
3. To increase the employment opportunities through fiscal incentives and in the form of tax rebates
and concessions.
4. To bring price stability, by fiscal tools
5. Protect the economy from inflation and damaging competition from foreign countries the
developmental planning projects
6. The changing of tax rates and changing government spending. The main point of fiscal policy is to
keep the surplus/deficit swings in the economy to a minimum by reducing inflation and recession.

4.2 Tools of fiscal policy

1. Taxes
2. Government spending
5 Keynes’s VS Monetarist

5.1 Keynes View point:

In the macro economic policy debate Keynes views are different from monetarist Keynes was born into a
comfortable English social class that considered itself born to rule he was a Capitalist.

According to Keynes economy basically and inherently unstable in other words in economy ups and downs
comes in aggregate demand and aggregate supply, and until and unless policy makers don’t use both Fiscal
and monetary policy to stabilize the economy these fluctuations will produced the unwanted results in
aggregate output, unemployment, and inflation. In other words macro economic policies will move against
the wind mean when there is depression in economy and when the economy is heated up there is need of
policies to lift up and cool down the economy.

In short according to Keynes to stabilize the economy at the equilibrium position there is always need of
policies and fiscal policy is better to do this.
5.2 View point of Monetarists:

According to monetarist the economy is basically stable. They are of the view that there is no need for any
economic policy because economic policies are the causes of fluctuation in the economy.
Therefore according to the monetarists for fine tuning of the economy nothing is require rather the policy
makers must keep in view the limitations of economic policies before implementing them.
In short comparison of Keynes and monetarists

Fiscal Policy Monetary Rule

The Keynesian
- Monetarist

TABLE 1

Keynesians Monetarists

The economy is basically and inherently unstable. Economy is basically stable

Both fiscal& monetary policies are required to
No need of policy
stable it but Best is Fiscal policy
AS curve has a steep slope.
AS curve can be flat
.
6 Role of Fiscal policy and monetary policy in Keynes’s view

Now we will see that how Keynes proved that F.P is better than M.P to control the economy

6.1 Keynes Real sector

1. According Keynesian investment spending is less sensitive to rate of interest which means investment
curve/ function is steep or less elastic in nature

Investment = f (i)

2. Less elastic result

Degree of response on result
They also said interest rate and national income are also less sensitive to each other in goods market so IS
curve is less elastic and steep in nature

3. They also said prices and quantity demand also less sensitive to each other hence AD curve is also less
elastic of steep in nature.

6.2 Keynes Monetary sector:

Liquidation Preference theory:

TO find out the

Md/p = Ms/p

1. Interest rate and (M/p)d (real demand for money) are more sensitive to each other so (M/P)d curve is
more elastic or flat in nature
2. Interest rate & national income are also more sensitive to each other so liquidity of money (LM) curve
is more elastic and flat in nature.

Money market

Y↑ → (M/P)d↑ i↑ LM curve

I = f(Y) ---------- LM curve

(M/P)d = (M/P)s

 Fiscal policy effects of IS curve

 Monetary policy effects LM curve

To get out of the depression we have to adopt both policies (monetary policy , fiscal policy) and then
check how much % fiscal policy help and how much % monetary policy helps .so according to Keynesian
fiscal policy helps more.”
6.3 Real sector graphs:

1. Investment function
Steep and less elastic relation Fig 1

I = f (i)
-ve relationship

I
2. IS curve
Steep and less elastic relation

i Fig 2

Y = f (i)
-ve relationship

IS

3. AD curve
Steep and less elastic relation

P Fig 3

Qd = f (P)
-ve relationship

AD

Qd
6.4 Monetary sector graphs

Real demand for money Mtd curve

 Flat curve
Fig 4

(M/P)d = f (i)

(M/P)d

LM curve

i Fig 5

i= f (Y)

Y
7 Proof of Keynes that Fiscal policy is better than monetary policy

According to Keynes school of thought fiscal policy is more effective to bring the economy out of depression
situation as compared to monetary policy.

LM
LM1
IS- LM Model
E2
i2

i* E

i1 E1
IS1
IS

Y* Y1 Y2

AS

AD-AS Model

e1 e3
e
P*

AS AD2
AD1
AD

Y* Y1 Y2 Yf

 Due to easy Monetary policy both LM and AD curves shift right side
 Due to easy fiscal Policy both IS and AD curve Shift to right side

Hence it is proved that F.P is more effective than MP

MP is less effective because it is associated with some weaknesses which are giving below

1. Reverse causation
2. MP in depression
3. Velocity of circulation of money
4. Monetary lags
5.
7.1 Weakness of monetary policy
7.1.1 Reverse causation:
Above we outlined that easy monetary policy may result in increased level of national income but Keynesian
think that such causation has also a reverse causation. It is experienced as:
We know that Mtd = f(Y) accordingly when ever due to easy monetary policy level of income increases the
transitive demand for money increases. This will have the effect of increasing the rate of interest. The
increase rate of interest may offset the expansionary effects of easy monetary policy. In such situation if
supply of money is increased to check rising rate of interest it may result in inflation. On the other side
whenever due to tight monetary policy level of income decreases, the transitive demand for money will
decreases. This will have the effect of decreasing the rate of interest. The decreased rate of interest may
offset the effects of tight monetary policy. In such situation if supply of money is increased to check the
falling rate of interest, it may result in deflation. All this shows that both the targets of rate of interest and
supply of money cannot be attained at the same time.

7.1.2 Monetary sector in depression:

Keynesians also present the case of depression where changes in rate of interest do not influence level of
investment .accordingly MEI and IS curve become vertical. On the other hand because of liquidity trap LM
curve becomes horizontal. Thus in the presence of vertical IS and horizontal LM the easy monetary policy
will fail depression from the economy.

7.1.3 Velocity of circulation of money:

According to Keynesians the velocity of circulations of money is concerned with the demand for money.
As Md = Mtd + Msd. The Mtd is attached with active money. Accordingly velocity of such money will be
positive. While demand for money which is concerned with speculation or money which is like an asset has
zero velocity of money. All this shows that the velocity of circulations of money depends upon how money
supply is distributed into Mtd and Msd. moreover the monetary policy which has an effect on active money
has an impact on the level of income and employment.

7.1.4 Monetary lags:

Classical and monetarist are of the view that monetary policy is more effective for economic stabilization but
monetary policy is attached with time lags which hamper the effectiveness of monetary policy

7.1.5 Reconigation lag;

What will the future trend of economics’ activities, can not in predicted. In other words it is difficult to access
that if today there is inflation, whether it will remain on inflation in future. if economy is experiencing
depression today, ether after six months the same depression will last for .such like situation is given the name
of Reconigation lag.

7.1.6 Operating lag;

The operation lag raises when the need for some action is realized and when the actual step is taken to adopt
some policy measure. In other words, a time period may involve in the operation of some action. There are
certain economics and political implications of each monetary action .accordingly, the operational lag may be
prolonging one.
8 Role of F.P and M.P in Monetarist view

8.1 Real sector is flat

1. According to Monetarists Investment Spending is more sensitive to rate of interest which means
investment curve is flats and more elastic in nature.

If we i 100% I will more than 100%.

2. Interest rate and National Income are more sensitive to each other.

IS curve is more elastic and flatter.

3. Price and Qd are more sensitive to each other.

Hence AD curve is more elastic and flatter in nature.

Real sector of monetarist

1. Investment function
Flat curve Fig 7

I = f (i)

2. IS curve

i Fig 8

Y = f (i)

IS

Y
 3. AD curve

P Fig 9

Y= f (P)

AD

8.2 Monetary sector of monetarist

4. Real demand for money curve

 Flat curve
Fig 10

(M/P)d = f (i)

(M/P)d

5. LM curve

i Fig 11

i= f (Y)

Y
8.3 Proof of monetarists that monetary policy is better than fiscal policy

IS- LM Model
i LM LM1

E1

E
i*
E2 IS1

IS

Y* Y

P AS

AD-AS Model
e3
e e2
AD2
AS
AD AD1

Y* Y1 Y2 Yf Y

 Due to easy F.P both IS and AD shift to right side.

 Due to easy M.P both L.M and A.D curve shifts to right side

According to the Monetarists to free an economy from depression situation monetary policy plays and
effective role as compared to fiscal policy. F.P can’t play as much an effective role as monetary policy plays
Because F.P has some weakness like fiscal lags,
9 The Macro economic policy debate

9.1 Whether the policies be adopted or not?

In order to answer the following questions there has been made some argumentation that whether the
policies should play an active or passive role.
&
If the policy makers decide to operate some economic policy then should they use the discretionary power
or depend upon some rules.

9.2 Should policies be active or passive?

Whether it is us or Pakistan the economist is their economic affair departments are found busy in
considering the state of economy i.e. whether the inflation rate is falling or rising whether the income &
employment is rising or falling.
In their consideration some economists are in favour that government should adopt easy fiscal policy or
tight fiscal policy according to the situation otherwise we will have to face depression like 1930.

But few are favour of that we should not activate any kind of fiscal policy they are in favour of monetary
policy.

9.3 According to the Keynesian:

To considering all these things the Keynesian are in favour of depending upon active fiscal and monetary
policies for economic stabilization.

9.4 According to the Monetarists:

Monetarists do not like depend upon fiscal and monetary policies for the economic stabilization. Or
they depend upon passive type of economic policy as following problems are attached with these policies:
10 Problems in implementation of policies
There are some problems in the implementations of fiscal and monetary policies actively,

 Lags in implementation and effects of policies

 Difficult job of economic forecasting
 Ignorance expectations & locus critique
 Historical background.

10.1 Lags in implementation & effects of policies

Economic stabilization will become be easier if the effects of some economic policy are readily discerned.
When we adopt some policy it needs some time to be implementing so that time duration is called
“LAG IN IMPLEMENTATION”

Policy makers would simply adjust their instruments to keep the economy on the desired path. Making
economic policy is just like to drive a car .A car changes direction almost immediately after the steering
wheel is turned .and just like that the policy makers arrange their instruments to keep the economy on the
desired track.

But the implementation of policy is just like to sail a ship .a ship changes course long after the pilot adjusts
the rudder and once the ship starts to turn it continues turning long after the rudder set back to normal. Like
a ships pilot economic policy makers face the problems of long lags which is even more difficult because the
length of lags are hard to predict.

These create great complications to conduct fiscal and monetary policies.

10.2 Types of time lags:

Economist distinguishes between two lags in conduct of stabilization policy.

1. Inside lag
2. Outside lag

Inside lag

“The inside lag is the time between a shock to the economy and the policy action responding to that
shock”
This lag arise because of

 First the policy makers take time to recognize that a shock has occurred
 Then put the appropriate policies in to effect

Outside lag:
“Outside lag is the time between a policy action and its influence on the economy”

This lag arises because:

 Policies do not influence immediately on the economic factors like spending income and employment.
 A long inside lag is central problem with using fiscal policy for economic stabilization. while the
monetary policy has a much shorter inside lag than the fiscal policy because a central bank can decide
on and implement a policy change in less than a day.
 The advocates of passive policy argue that because of these long and variable lags associated with
monetary and fiscal policies the successful stabilization policy is almost impossible.

10.3 Difficult job of economic forecasting

Because the policy influences the economy only after a long lag. Therefore the successful stabilization policy
requires predicting accurate future economic conditions.
 If we can not predict whether the economy will be in boom or recession in coming six months or a
year we cannot evaluate whether monetary or fiscal policy should now be trying to stabilize the
economy.
 Unfortunately economic developments are often unpredictable.
 They are some measures used to predict the economic condition.
a) One is known as leading indicators.
b) Second one is known as Macro Econometric Models.
These computer models made up of many equations, adopted by the Govt agencies and by public or private
firms for making predictions and policy analysis.

Ignorance expectations & Locus Critique

The prominent economist RORERT LOCUS

“As an advice giving profession we are in way are our heads.”

By
Ignorance: he means whenever the economist estimates the effects of an alternative economic policy. They
are not completely aware of the conditions and so are not confident about them. By
Expectations: He emphasized Issue of how people from expectations of the future.
According to him expectations play crucial role in the economy because they influence all sorts of economic
behavior.

Types Of expectations
R
p
d
A
n
o
ti
a l
e
a
v
i
d
a
r
T
ti
o a
n
l
e
t
p
x
c o
ti
a
e
a
t
p
x
c ti
s
n
o
s
n

Adaptive expectations:
According this approach it is assumed that

“The people form their expectations of variable based on recently observed values of the variable.”
Rational expectations
According to this approach it is assume that
“People optimally use all available information including the information about current and prospective
policies to forecast the future “
Locus critique:
According to Prof LOCUS, on the basis of traditional method when we analyze any policy we do not keep in
view the effect of policy on expectations. Therefore, the criticism which is made on the analysis of traditional
policy called “LOCUS CRIRIQE”
EXAMPLE:
An important example of “LOCUS CRITIQUE” arises in the analysis of “Disinflation”. The cost of reducing
inflation is often measured by the “Sacrifice Ratio”

SACRIFICE RATIO = %age ∆ in GDP

% age ∆ in inflation

Locus critique lesson:

The locus critique leaves us with two lessons
 Narrow lesson
 Broad lesson
Narrow lesson:
The narrow lesson is that economists evaluating alternative policies need to consider how policies often
affects expectations and, thereby, behavior.
Broad lesson
The broad lesson is that policy evaluation is hard, so the economists engaged in task should be sure to show
the requisite humility. In this the up gradation of policies flexible and they are adoptable.
Historical records:
In judging whether government policy should play active or passive role in the economy, we must give some
weight to the historical records if the economy has experienced many large shocks to AD and AS and policy
has successfully insulated the economy from these shocks then the case of far active policy should be clear.
 Conversely, if the economy has experienced few shocks and fluctuations can be traced by interrupt
policy, then the case for passive policy should be clear.
 In other words our few of stabilization policy has historically been stabilizing or destabilizing.
 The historical record often permits more then one interpretations.
Great depression
A case in point
 Some economists believe that a large contracctionary shocks to PVT spending cause the
depression
 Other believes that the large fall in money supply cause the depression
 They assert that the depression would be avoided by passive monetary policy
 Great depression can be viewed either as an example, why active MP and FP is necessary, or why
it is dangerous
11 Should policies be conducted by rule or by discretion?
A second topic of debate among economists is whether policy should be conducted by rule or by discretion.

By rule:

A policy will be implemented under rule if policy makers in anticipation announce, what will be the reaction
of this policy in different situations, and then they follow this “rule & law.”
 A policy which has been adopted under some rule approach may be active as well as passive.
 As an example
A passive policy rule might specify steady growth in the money supply of 3% per year.
While an active policy rule might specify that MS should by increased by following method;

Money growth = 3% + ∞ (UA- UN)

Under this rule, if unemployment increases from its natural unemployment then money growth will increases
according to the value of ∞.
The rules try to stabilize the economy by raising or decreasing the growth rate.

By discretion:

“The steps which are necessary to adopt to meet any economic issue, when implemented are called discretion”
“A policy will be discretionary when the policy makers implement the policy according to situation of
occurrence & decision separately for each case”

Discretionary powers

Discretionary powers are those who have the authority to implement the policies.

11.1 Distrust of policy makers & Political process

Some economists believe that economic policy is too important to be left to the discretion of the policy
makers.
Although this view is more political than economic.
 If in a country the politicians are inefficient like Pakistan they always entrusted to user the powers of
using Fiscal policy, and monetary policy, because they always misuse of powers.
Incompetence in economic policy arises for several reasons:
a) Shifting of powers to special interest groups.
b) Macro economics is complicated and the politicians often do not have sufficient knowledge to
make informed judgments.
Opportunism in economic policy arises when the objective of policy makers conflict with the well being of
the people.
 Some economists fear that politicians use macro economic policy to further their own electoral ends.
 All such means to say that the politicians in order to attain their election aim so often use economic
policies under discretionary powers.
 Manipulation of the economy for electoral gain, is called the political business cycle
 Some economists have purposed constitutional amendments’ such as Balanced Budget amendment;
that would tie the hands of legislators and insulate the economy from both incompetence and
opportunism.
11.2 Discretionary policy time inconsistency
Time inconsistency is that with the passage of time, conditions or situations does not remain same,
there is inconsistency in time. So discretionary powers show inconsistency in their policies.

 Some experts think that if we trust over our politicians, that the discretionary policy look better that
the fixed policy of “rule and law”.
 This is because the discretionary policy is flexible on the ground of its structure and politicians will
use them following the changing circumstances.
 But due to time inconsistency which is attached with any of the policy. The policy experts consider
rule approach better than the discretionary approach.
 It has been observed that policy makers announce some of their policy so that economic agents could
devise their expectations.
In coming days it is not necessary that the policy makers will fulfill their promise regarding
their preannounce policy.
Therefore the situation of distrust is created in such situation of distrust is created, in such situation the rule
method will be better that discretionary approach.

12 Rules for Monetary policy

Monetary policy is a policy adopted by the central bank; the policy makers suggest the following rules to
stabilize the economy.

Rules suggested by policy makers:-

a) Role of money supply.

b) Nominal GDP targeting.
c) Inflation targeting

Role of money supply

According to monetarists:

MS must increase at a constant rate every year. Because it is MS which creates fluctuations in the economy.
Therefore to stabilize the economy MS must increase at steady rate.
But according to few
In order to stabilize the economy, along with increment in ms at constant rate it is necessary to keep
constant he velocity of circulation of money, otherwise unnecessary flucations will like to occur.

Nominal GDP Targeting

Make it rule that;

a) if Nominal GDP > Targeted GDP
Then,

AD P Inflation

So,

The MS will have to decrease

 b) If

Nominal GDP < Targeted GDP

Then,

AD L Y Unemployment

P results Deflation.

So,

The MS will have to be increased.

c) If

Nominal GDP = Targeted GDP

So,

The MS will not be changed.

Inflation Targeting:

If
Actual Inflation > Targeted Inflation

Then,

MS should be

If,
Actual Inflation < Targeted Inflation
Rules for fiscal policy
Although most discussion of policy rules center on monetary policy, economists and politicians also
frequently purpose rules for fiscal policy.
 The rule that has received the most attention is the balanced budget rule (BBR)

 Under the balanced budget rule the government would not be allowed to spend more that its receives
in tax revenue.

 Most economists oppose a strict rule requiring the government to balance its budget.

There are three reasons to believe that a budget deficit or surplus is some times appropriate or better than
BBR.

Reasons: Why Budget deficit or surplus is better than BBR:

 A budget deficit or surplus can help to stabilize the economy. As whenever the goes into the recession,
taxes automatically fall, and transfers automatically increases.
These automatic responses help to stabilize the economy; they push the budget into the deficit.

During recession

Taxes Transfers BD

If government made balanced budget, the role of fiscal stabilizers like taxes and transfer payments will
come to an end. If strict BB is pursued the depression will increases when expenditure are reduced
because of fall in revenues.

 A budget deficit or surplus can be used to reduce the distortion of incentives caused by the tax system.

Tax smoothing

Higher the rate of taxes more will be social cost of imposing tax.
“To keep the social cost of the taxes lower it is necessary that they should remain stable, rather heavy
fluctuations. This policy is called the policy of tax smoothing.”
The tax rates can be smooth if when incomes are low during depression, government should make deficit
budgets.
 A budget deficit can be used to shift a tax burden from current to future generation.

Examples:

Some economists argue that if the current generation fights to maintain its freedom, future generation benefit
as well as bear some of the burden. To pass on some of the war’s cost, the current generation can finance the
war with a “budget deficit”

The government can later retire the debt by levying taxes on the next generation.

These considerations lead most economists to reject a strict balanced budget rule.

13 Arguments in the favour of rules

Firstly:
Both the monetary and fiscal policies affect the economy with a certain time lag. Any mistake in calculation
of the length of the time lag aggregate the intensity of phase of business cycle.
Secondly:
Rules lead to economic stability and keep the private economic decisions makers both accurately forecast the
future.
Thirdly:
Rules as opposed to discretion will save the economy from the atrocities of politicians.
Fourthly:
Variations in the rate of monetary growth strongly dominate variations in the rate of nominal economic
growth not in the real economic growth.
Fifthly:
Errors and uncertainties associated with discretionary monetary policy are so numerous and vast that the
discretion would always lead to economic instability.
Lastly:
Discretionary policies can affect the economy only if it comes all of a sudden. Such as policy will be fool the
private economic decision makers and as a result scarce economic resources will be misallocated.

14 Arguments in the favour of discretionary policy

The proponents of discretionary policy move the following arguments in favour of discretion
Firstly
The velocity of MS may charge in some unforeseeable way during recession or a boom and the constant
money growth rule may aggravate the intensity of the phases of business cycle.
Thus it is preferable that the central bank be given the discretion to adjust the MS to large and small changes
in the velocity.
Secondly:
The time lag required for monetary and fiscal policy effect the economy can be incorporated into
discretionary policy by accurately forecasting the future course of economic activity.
Thirdly:
Defenders of discretionary monetary policy argue that MS can readily be manipulated to counteract cyclical
effects. They firmly state that the presence of errors and uncertainties can prevent the discretionary monetary
policy from being perfectly counter cyclical but not from being mostly counter cyclical.
Fourthly:
The assumptions of wage price flexibility held by the rational expectations theorists in opposition to
discretionary monetary policy may not held in real world. Thus monetary policy will have real effects even if
it does not come as surprise.

15 Conclusion:
From the above debate, we have analyzed whether a policy should be active or passive, while the economists
are facing Fluctuation. In this way, should a policy be arranged according to certain rules and regulations or
the politicians should be given discretionary authority in this matter. We have also seen that countless
(boundless) arguments are present in the support and in opposition as well, of each policy. So we reach to the
conclusion that none of the policies has complete legitimacy. In addition to economic arguments, political
arguments are also present in the support of each policy and in opposition as well. So, after the whole analysis
government can take some decisions weather the economic policy should be active or passive. It should be
discretionary or it should be set according to some rules and laws. Whatever the results would be, positive or
negative, the economists have to play an important role in policy making. Finally we come at this point that in
countries like Pakistan where no political stabilization and every Government is involved in corruption here
fiscal policy cant work better to control the economy because politicians use their powers always in –ve way
so monetary policy should be adopted in Pakistan but if people of Pakistan elect some honest and loyal
government then by using tax and expenditure system the economy of the Pakistan can not only be stable but
also growth can be seen.