What is the difference between fiscal and monetary policy?

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pohnpei397 eNotes educator| Certified Educator

Although fiscal policy and monetary policy are similar in terms of their goals, there are two major differences between them.

Both fiscal policy and monetary policy have the same goal.  Both of them are concerned with creating and maintaining stable economic growth in an economy.  Both are meant to ensure that GDP will grow while inflation stays low and predictable. 

However, there are two important differences between these two types of policy.  The first has to do with who makes the decisions about the kinds of policy.  In the United States, fiscal policy is set by the elected branches of the government.  Congress and the President must agree on fiscal policy.  It is therefore set by politicians and is dictated in large part by political considerations.  By contrast, monetary policy is set by the Federal Reserve (the Fed), which is a group that is not elected.  Monetary policy should therefore be less affected by political considerations.

The second difference is in how these policies attempt to achieve their goals.  Fiscal policy involves changes in tax rates and in government spending.  By contrast, monetary policy involved changing the money supply.  It involves things like changing interest rates to vary the amount of money that is in the economy.

Thus, the two kinds of policies have the same goal, but are made by different entities using different tools.

Zaca | Student

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nikasho0100 | Student

Fiscal policy are policies that influnce the tax rates and government expenditure in the country WHEREAS monetary policeis are policies that influnce the interest rates of a country..

Anyway by bringing changes to both these policies the government can acheive its macroeconomic objectives up to a certain extend......

philyinks | Student
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.While In economics and political science, fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy.[1] Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and spending. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy: * Aggregate demand and the level of economic activity; * The pattern of resource allocation; * The distribution of income.