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(a) (i) Explain the terms fiscal policy and monetary policy - Leaving Cert Economics - Question 5 - 2018
Question 5
(a) (i) Explain the terms fiscal policy and monetary policy. (ii) Outline how Ireland's membership of the Eurozone affects the operation of the Government's mone... show full transcript
Worked Solution & Example Answer:(a) (i) Explain the terms fiscal policy and monetary policy - Leaving Cert Economics - Question 5 - 2018
Step 1
Explain the terms fiscal policy and monetary policy.
Answer
Fiscal policy refers to any action taken by the government that influences the timing, magnitude, and structure of its revenue and expenditure. This includes changes in government spending and taxation designed to manage the level of economic activity, aiming to influence overall economic performance.
Monetary policy, on the other hand, involves actions taken by a central authority, typically a country's central bank—in Ireland's case, the European Central Bank (ECB)—to control the money supply, interest rates, and the availability of credit within the economy. This policy aims to stabilize the currency, achieve low inflation, and foster economic growth.
Step 2
Outline how Ireland's membership of the Eurozone affects the operation of the Government's monetary policy or fiscal policy in Ireland.
Answer
Membership in the Eurozone means that Ireland does not have control over its own monetary policy; this responsibility is delegated to the European Central Bank (ECB). Thus, monetary decisions are made at the European level, which may not always align with Ireland's specific economic needs or conditions.
For instance, Ireland's economy represents only a small portion of the Eurozone, and decisions made by the ECB may not consider the unique economic situations in Ireland. This can lead to situations where the ECB's interest rate policy may not be suitable for Ireland.
Moreover, the ECB cannot adjust monetary policy locally, which limits the government's ability to respond to domestic economic conditions effectively. Fiscal policy remains a national responsibility, though it stays within the constraints of EU regulations and guidelines.