Fiscal Policy vs. Monetary Policy
Definitions
Expansionary vs Contractionary for both fiscal and monetary policy
Fiscal policies are used by policymakers to influence economic
demand
Examples of monetary policy instruments
Fiscal policy strengths and weaknesses
Monetary policy strengths an...
Economic policy makers have two types of tools to influence a
country's economy: fiscal and monetary. Government expenditures
and income generation are governed by fiscal policy. For example,
when demand in the economy is low, governments can step in and
spend more to stimulate demand. Alternatively, tax cuts can
increase disposable income for individuals and businesses.
Monetary policy refers to the money supply governed by factors
such as interest rates and bank reserve requirements (CRR). For
example, to control high inflation, policymakers (usually
independent central banks) can raise interest rates and thereby
reduce the money supply.
These methods are applicable to market economies, but not to
fascist, communist, or socialist economies. John Maynard Keynes
was a major proponent of government action or intervention to use
these policy tools to boost the economy during recessions.
, Fiscal coverage is using authorities spending and revenues to
persuade the economy. Monetary policy is the process by which a
country's monetary authority manages the money supply, often
targeting interest rates to achieve a set of goals aimed at economic
growth and stability.
Governments use fiscal policy tools to manipulate aggregate
demand levels in the economy to achieve economic goals such as
price stability, full employment, and economic growth. And
monetary policies to manipulate the money supply to influence
outcomes such as economic growth, inflation, exchange rates with
other currencies, and unemployment.
Fiscal and monetary policy can be either expansionary or
restrictive. Policy measures taken to increase GDP and economic
growth are said to be expansionary. Actions taken to curb an
"overheating" economy (usually when inflation is too high) are
called contractionary measures.
Fiscal policy is governed by the legislative and executive parts of
the government. The President's administration in the United
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