Monetary Policy
This policy is implemented by the central bank. It consists of management of money supply and interest rate, also knows to be the demand side economic policy which is implemented by government in order to achieve macroeconomic aims like consumption, growth, liquidity and inflation.
This policy includes cutting interest rates, which decreases cost of burrow and encourage people to spend and invest. This increases aggregate demand and will lead to increase in gross domestic product, which reduces the demand deficient unemployment. Lower interest rates reduce the exchange rate so that it would make exports more competitive. This policy can too be implemented so fast unlike the fiscal policy which consumes more time and also this policy is flexible for changes implemented.
On the other hand, lower interest rates may be ineffective in increasing demand. This policy may to contribute in reducing demand deficient. Effectiveness of this policy depends on the type of unemployment that occurred. This maybe too be a bad choice because by increasing the aggregate demand it causes to inflation to rise.
Fiscal Policy
This policy states like use of government spending and taxation policies to influence economic conditions and Aggregate Demand. Also, similar macroeconomic aims like monetary policy except some like employment, inflation, economic growth and aggregate demand for goods and services.
This policy reduces unemployment by increasing aggregate demand and rate of economic growth. Discretionary changes in direct taxation may regulate the AD (aggregate demand). Taxation incomes can be used to for welfare developments and helps to reduce the poverty gaps and promotes equity. This may increase the consumption of merit goods through subsidies and direct government provision.
On the other hand, using fiscal policies may create conflicts between other policies. Fiscal policies may create time lag too. If economy is already close to the full capacity, an increase in aggregate demand will only cause the inflation to rise. This policy is not flexible to any changes implemented and takes time to be in action.
Supply Side Policy
Supply side policy is designed to influence the supply, so this includes a range of policies like international competitiveness, productivity, improved efficiency and reduce costs, so that the economy can grow in terms of gross domestic product without contributing or causing inflation to the economy like fiscal and monetary.
This policy helps to reduce the inflation level of the economy and also increase the supply output of the economy, causes the gross domestic product to rise, so economic growth can be achieved. The employment rate will rise, and unemployment rate will be declined along with the rise of the productivity and output level of the economy. Also, in long run it increases competitiveness in trade because of exports maybe cheaper due to productiveness and efficient production process.
On the other hand, implementing supply side policies takes more time because supply or output of the economy cannot be increased in short time, so it is a long-term aim and has a big time lag. In addition to those policies are also considered to be so costly to be implemented, for example, providing education and training to workforce. This policy is also creating reduction power of various interest groups because this increases competition and productivity, it may negatively affect the local firms to cut down profits and many more reasons in order to sustain in the market.
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