Governments play major roles in the economy and have a powerful effect on the stabilization and the growth of any given economy. To achieve steady and sustainable growth, the government uses different tools to influence a nations economic activity (Mankiw, 2012). Amongst these tools, the most widely recognized are the monetary and fiscal policy. Monetary policy is one of the public interventionist measures that concern the actions of the central bank attempting to manage interest rates as well as influence the total supply of money in circulation at any given point in time. It aims at influencing the level and the pattern of economic activity so as to achieve certain desired goals by manipulating the quantity, the cost, and the availability of money and credit in the economy.
The central bank controls some monetary variables to affect the goals which it does not control with the objective of conducting monetary policy. The instruments of monetary policy to be used by the central bank depend on the economic levels of an economy. The commonly used instruments include reserves requirements that urges deposit banks to hold a percentage of their deposits with the central banks; open market operations that implies the central bank purchasing or selling government securities to the banking and non-banking public (Dadkhah, 2009). Other instruments of monetary policy are deficit financing namely the government resorting to borrowing from the central bank in a case when there is a deficit in the budget as well as moral suasion where the central bank regulates the opening of new deposit banks. Some of the objectives of monetary policy include attainment of full employment, price stability, and economic growth as well as maintenance of equilibrium in the balance of payments.
Fiscal policy, on the other hand, is mainly based on the ideas of John Keynes, a British economist, who believed that governments could adjust tax rates and government spending in turn changing economic performance. Therefore, fiscal policy can be defined as a tool by which the government adjusts its spending actions and revenue collection in an attempt to manipulate the level of aggregate demand (Mankiw, 2012). By this policy, regulators seek to stabilize the economy through the course of the business cycles. Just like in monetary policy, fiscal policy has instruments that the government manipulates to achieve economic goals. The instruments of fiscal policy include the budget that ensures there is a balance between income and expenditure; taxations, since it has an effect on disposable income, consumption, and investment; public expenditure, public works and public debt, since it is a powerful tool to fight inflation and deflation and it, in turn, helps achieve economic stability and full employment (Mankiw, 2012). The main functions of the fiscal policy include the allocation by ensuring the provision of social goods, adjustment of the distribution of income and wealth, stabilization, and economic growth.
The UAE, the federation of seven states in the Middle East, has its capital city at Abu Dhabi. The national language of the country is Arabic with the dominant religion being Islamic. With the population of around 9.3 million, the federation boasts of being a regional trading and tourism hub. It is ranked as the second largest economy in the Arab world with GDP of 599.8 billion dollars. Its GDP growth over the years is mainly attributed to the increased contribution of non-petroleum sectors such as banking, tourism, commerce, and real estate with oil revenues contributing up to a third of the GDP (Espinoza, 2013). The main economic activities include tourism, fishing, and mining while other main industries in the region are petrochemicals, commercial ship repair, pharmaceuticals, steel industry, and textiles. For 2015, its exports were valued at 323.8 billion dollars with its imports amounting to 273.5 billion dollars. The major imports include machinery and transport equipment, chemicals, and food. The unemployment rate is at 3.6% and the inflation rate is 2.3%.
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The worlds largest economy, the United States, has the population of 321 million people, nominal GDP of 18.56 trillion dollars, an unemployment rate of 5.3% and an inflation rate of 0.7%. The US economy is dominated by service oriented companies in different sectors such as technology, financial services, and healthcare. The manufacturing sector is also significant representing about 15% of output. On the other hand, agriculture represents less than 2% of the output, but the US remains a net exporter of food owing to its large parcels of arable land. The workforce in the US is well-educated and skilled, therefore making the business environment more favorable. Ongoing innovation, research, and development, as well as capital investment, have propelled the economy towards sustainable growth. Following the financial crisis in 2007-2008, (Spilimbergo, Symansky, Blanchard, & Cottarelli, 2008) the US economy is slowly recovering and has received further support from the expansionary monetary policies.
The UAE is a member of the Gulf Cooperation Council, and its fiscal policies differ from those of the US. The UAE has adopted expansionary fiscal policy that plays a major role towards the high increase in the nations GDP. Most of the utilities are controlled by the rulers and amongst the most valued of them is oil. The nation has been able to expand its economy and widen its economic horizons owing to the numerous investments that it has been able to steer as a result of the presence of oil. It is evident that the UAE has a good fiscal policy geared towards the growth of national economies and rational interests by stabilizing prices, maintaining unemployment rates low (Askari, 2013), which is evidenced by 3.6%, and preserving good economic growth rates.
Fiscal policy was instituted into the US by President F. D. Roosevelt. As the country ushered in the 20th century, it was led in financial crises marked by debts of up to 1 billion dollars caused by the recessions and rising inflations. Later, the gross revenue was able to exceed the expenditure owing to increased borrowing from the intra-government debt holdings. Due to the high expenditure from collapse of high spending by the army in Afghanistan and other attacks, expenditure was more than income, therefore creating a deficit which prompted the government to raise taxes, and this caused a ripple effect by increasing oil and food prices. Several laws have also been passed to control the situation. Such laws include Affordable care Act in 2010, Budget control Act 2011, and American taxpayer relief Act 2012. The fiscal policy in the US is controlled by the executive and legislative branches of the government under laws of the Legislature.
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Considering the monetary policies, the UAE has the active monetary policy dedicated to the growth of its economy by maintaining stable goods prices and permanent economic growth as well as low unemployment levels. The UAE has a pegged exchange rate regime and, consequently, a limited scope to use monetary policy (MacDonald, 2010). The UAE has also issued more bonds with the aim of getting more money to invest. However, the results are tentative, and they may appear to be either affirmative or negative. If the results were to become negative, the goals of unemployment, low economic growth, and high prices of goods would be affected.
The US has mainly turned towards the expansionary monetary policies to recover from the financial crisis as mentioned earlier (Spilimbergo, et al., 2008). This includes measures such as holding interest rates at lower bound and the buying large amounts of financial assets by the government in an attempt to increase the money supply and hold long-term interest rates. Bank reserves are also affected by maintaining certain levels of reserves to meet unexpected outflows. The Federal is responsible for the monetary policy.
In conclusion, fiscal and monetary policies are important in regulating the economy of a country. Monetary policy is used by the government to regulate taxes, hence influencing the stability of the country. On the other hand, fiscal policy is a tool employed by the central bank of each country to regulate the money supply. The comparison between the fiscal and monetary policies in the UAE and the US shows that two governments use different tools to control the money supply in their countries.