What is the difference between fiscal and monetary policy?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

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.

Approved by eNotes Editorial Team

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial