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Difference Between Fiscal And Monetary Policy

Difference Between Fiscal And Monetary Policy

Fiscal and Monetary Policies

Fiscal and monetary policies are used by different nations to control inflation and promote economic Difference Between Fiscal and Monetary Policydevelopment. Fiscal policy refers to the government initiative to change the tax rates on certain commodities so as to influence the demand for such products in the economy. The government may also change its expenditure so as to control the aggregate demand in its economy. Fiscal policy is used by the government to manage the economy. For instance, the government may decide to reduce tax rates and increase expenditure during the economic recession so as to increase economic growth and increase demand for certain products.  Increased public spending enhances the supply of money into the economy (Langdana, 2007). This would facilitate the creation of more jobs. Increased spending also leads to multiplier effect thus increasing aggregate demand. On the other hand, during inflation, the government will raise tax rates and reduce its expenditure so as to curb inflation.

Monetary policy is carried out by the central bank to influence the supply of money in the economy by changing the interest rates. The central bank does this by setting the minimum interest rates which should be used to issue loans either to the government or the members of the public. This is aimed at either reducing or increasing the supply of money in the economy. For instance, the central bank may lower the interest rates so as to increase the amount of money in the economy. On the other hand, to curb inflation as a result of rapid economic growth in the economy the central bank would increase the interest rates, and this would increase the cost of borrowing (Buti, 2004). Besides, the consumers will reduce their spending and investment. In this case, the aggregate demand would decrease making the rate of inflation to go down. Moreover, the central bank may also implement the qualitative easing policy during the economic recession to protect its economy from falling apart.

  • Buti, M. (2004). Monetary and fiscal policies in EMU: Interactions and coordination. Cambridge [u.a.: Cambridge Univ. Press.
  • Langdana, F. K. (2007). Macroeconomic policy: Demystifying monetary and fiscal policy. New York: Springer.

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