What are similarities and differences between fiscal policy and monetary policy?

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mkoren eNotes educator| Certified Educator

Both fiscal policy and monetary policy impact our economy, and have similar goals. They can be used to try to keep inflation at a low rate. They also try to help achieve full employment and maintain positive economic growth. The implementation of both fiscal policy and monetary policy is meant to reduce cyclical fluctuations in the economy.

There are also some differences between these two concepts. Fiscal policy involves making changes in the taxation and the spending policies of the government. This could include increasing or decreasing government spending or increasing or lower taxes. Increasing government spending while lowering taxes would likely create a budget deficit while cutting government spending and raising taxes could lead to a budget surplus. In the United States, these actions are usually determined by the wishes of the President and the actions of Congress.

Monetary policy involves controlling the money supply by either raising or lowering interest rates. If interest rates rise, it will slow investment and expansion in the economy since it would cost more to borrow money. Demand for products should drop as less money should be available in the economy. Lowering interest rates would lead to more investment in the economy and should lead to economic expansion, since it would cost less to borrow money. Demand for products should increase as more money should be available in the economy. In the United States, the Federal Reserve Board controls the interest rates.

There are both similarities and differences between fiscal policy and monetary policy.

pohnpei397 eNotes educator| Certified Educator

There are two main similarities between fiscal policy and monetary policy.  The first of these has to do with the goals of these policies.  In both cases, the goal is to keep the economy growing at a steady pace.  In both cases, the goal is to make sure that there is economic growth (growing Real Gross Domestic Product and low unemployment) while simultaneously making sure that inflation does not become a problem.   The second similarity is in one part of the mechanism for regulating the economy.  Both types of policy are meant to affect aggregate demand.  Both types of policy will try to increase aggregate demand when times are bad and slow its growth when times are good.  The policies are not really able to affect aggregate supply.

There are also two main differences.  First, the two kinds of policies are implemented by different groups.  Fiscal policy is the domain of Congress and the President as it is set through laws.  Monetary policy is devised and carried out by the Federal Reserve, which is independent and unelected.  The mechanisms are also different to some degree.  Fiscal policy uses changes in taxes and spending to affect aggregate demand.  By contrast, monetary policy uses such things as interest rate changes and open market operations to affect aggregate demand.

Thus, the two sorts of policies are conducted by different groups in different ways, but both are meant to achieve stable growth by manipulating aggregate demand.