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?