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THE MACROECONOMICS POLICY INSTRUMENTS

THE MACROECONOMICS POLICY INSTRUMENTS

This is divided into namely;
A) The Monetary Policy Instruments and, 
B) The Fiscal Policy Instruments.

A) The Monetary Policy Instruments.

There are basically two types of monetary instruments namely: Direct and
Indirect
 Direct monetary policy instruments is characterized by the use of: Credit
ceiling, sectoral credit allocation, administrative control of interest and 
exchange rates, Moral suasion, movements of governments account in and 
out of the DMBs, issuance of stabilization securities etc. while
 Indirect Monetary Policy Instruments are market-based instruments and 
therefore, require a well developed and functional financial market. These 
Instruments include Open Market Operations, Liquidity Ratios, Cash 
Reserve ratios, Discount window operations, Expanded Discount Window 
operations (EDW) –Dec 2008 – Jul. 2009, Minimum Rediscount Rate 
MRR- up to Dec. 2006, Monetary Policy Rate – Dec 2006 to date

B) The Fiscal Policy Instruments –

The budgetary tools are basically the fiscal instruments. As defined earlier 
budget is an annual financial statement of government expected revenue and 
proposed expenditures. Like monetary policy, fiscal policy could be 
expansionary or contractionary both are referred to as discretionary policy. 
Taxation imposition and government spending are basically fiscal policy 
instruments. A reduction in tax couple with a ‗fat’ government spending imply 
an expansionary fiscal policy , the opposite is contractionary fiscal policy. 
These policies are applicable to different macroeconomic situations.
Self Assessment Exercise:
i. Give a solution to inflation using both fiscal and monetary policy
ii. Which of the tools you used above is most potent and why?

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