Question 3

Governments and central banks utilize fiscal and monetary policies to stabilize economies, contain inflation, and encourage economic growth. The use of government spending and taxation to influence the total level of economic activity is known as fiscal policy. It focuses on changing an economy's aggregate demand. Monetary policy is controlled by a country's central bank and entails controlling the money supply and interest rates in order to impact economic activity. The primary purpose of monetary policy is to keep inflation under control and to encourage stable economic growth.

Based on the statement above, answer the following questions:

1. Analyze the distinct roles that fiscal and monetary policies play in stabilizing economies during periods of recession or inflation. (1 0 Marks)
2. Discuss THREE (3) limitations a government might face when trying to implement effective fiscal policy in a highly interconnected global economy. (10 Marks)