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How are fiscal and monetary policy related?

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Both monetary and fiscal policies are related as components of a federal economic policy that influences growth. While monetary policy is overseen by the Federal Reserve, fiscal policies involving taxes and government spending are the result of compromise between the two major political parties in the executive and legislative branches.

Monetary and fiscal policies are related in the sense they represent an era of economic conditions. Fiscal policies have much more effect on consumers and the economy than monetary policies. One of the key facets of monetary...

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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.