How are fiscal and monetary policy related?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

The main relationship between these two types of policy is that they are both meant to keep the macroeconomy of a country stable.  That is, they are meant to keep both inflation and unemployment low.

In a sense, they are related to one another because they attempt to manipulate the spending patterns of the country's people.  Fiscal policy does this by affecting their disposable incomes in a pretty direct way.  Monetary policy does it in a much more indirect way by doing things such as changing the money supply.

So both types of policy are attempting to stabilize the economy by affecting the amount of consumption and production that goes on in the macroeconomy.

krishna-agrawala | Student

Fiscal policies and monetary policies are two ways in which government try to regulate the the economic performance in terms of variables such as growth, prices, investment and employment. Fiscal policy of government deals with governments taxing and spending programs while monetary policy deals with money supply including cash and bank deposits.

Economists believe that increased savings slow the rate of economic growth. In turn level of saving and spending depend on peoples expectations about the economy.  When they expect bad times ahead, they may decide to save their money.  Similarly, when businesses do not foresee future sales, they will hold back investment in new products or equipment. A government can influence these decision of public by appropriate fiscal and monetary policies.

For example, tax cuts give people more money to spend.  Also a government can regulate its own spending in such activities as public works and aid to the poor.  In addition lower interest rates encourage people and businesses to borrow money, which they will either spend or invest.

Monetary policies can be used to regulate the money supply in the economy, by changing the rate of interest that central banks charge and by changing other banking requirements such as reserve requirements. Governments can also issue bonds to reduce money supply. Thus it can follow a tight money policy to reduce the money supply, or a an easy money policy to increase money supply.