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The government uses both fiscal and monetary policy to stimulate the economy (get it growing) and also to slow the rate of growth down when it gets overheated. With fiscal policy the government influences the economy by changing how the government collects and spends money. The most common tools that the government enacts to effect fiscal policy include:

Increased Spending on new government programs and initiatives (such as job creation programs). This has the effect of increasing demand for labor and can result in lower unemployment levels

Automatic Fiscal Programs are programs that take effect immediately to help correct the slide in the economy. Probably the single best example of this is unemployment insurance which a person can file for as soon as they lose their job.

Tax Cuts are another tool that government uses to stimulate demand for goods and services when the economy takes a turn for the worse. The effect of a tax break is to put more money back in the pockets of businesses and consumers which they can spend and put back to work in the economy.

Monetary Policy, on the other hand, involves the manipulation of the available money supply within the economy. In the United States, the role of manipulating the money supply falls to the Fed or the central bank in the US. Not only does the Fed have overall responsibility for the country's monetary policy, but it also has responsibility for issuing currency and overseeing bank operations. An increasing money supply puts more money in the hands of consumers which they turn around and spend - a decreasing money supply does just the opposite.

In order to increase or decrease the money supply, the Fed has four principal levers which it pulls to try and effect change. The first thing that the Fed can do is to alter the reserve ratio which is the percentage of assets that commercial banks have to keep on deposit at one of the Federal Reserve Banks - the higher the reserve ratio, the less money that banks can lend out to the general public.

Another way the Fed can control the money supply is by adjusting the federal funds rate (fed funds rate). The federal funds rate is a short-term borrowing rate that banks have established amongst themselves for short-term borrowing. Another way the Fed can adjust the money supply is by raising or lowering the discount rate which is the rate at which commercial banks can borrow money from the Fed. The higher the rate (or interest charged on the loan), the less inclined commercial banks are to borrow and a smaller amount of money will be available in the market. And lastly, the Fed can buy and sell government bonds. The buying of bonds translates into income for the US government, which can in turn put more money into the economy.


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โˆ™ 2010-02-02 10:12:24
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Q: What is the difference between fiscal and monetary policy?
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Related questions

Difference between fiscal and monetary policy?

difference between fisal and monetry policy

What is the difference between monetary policy and fiscal policy?

Explain the government taxing and spending decision

What is the difference between fiscal and financial and monetary policy?

Fiscal policy: changes the level of government spending or taxation. Financial policy: changes the level of investment or saving. Monetary policy: changes the level of money supply or interest rates.

What is the difference between fiscal policy and monetary policy?

Monetary policy refers to the measures taken by the Bank of Canada to influence the economy by regulating the amount of money in circulation. Fiscal policy (budgetary policy) refers to the measures taken by the government to increase or decrease public spending and taxes.

What is the difference between fiscal monetary and supply-side economics policy?

The fiscal policy focuses on how government intervention will shift the demand depending on which issue is the most pressing. The supply policy is used when more employment is needed.

Difference between monetary policy and fiscal policy?

Monetary policy is one that containes money. this is the release and subsctraction of amount of money in economy by variuos tools (like loans to banks). Fiscal policy is government policy of taxation and subsidising (and goverment consumption). in lamens terms it is the taxing and wellfare of the nation.

What is the main goal of both fiscal and monetary policy?

The main goal of both fiscal and monetary policy is to stabilize the economy.

What is the difference between Tight monetary policy from easy monetary policy?


Is fiscal policy better than monetary policy?

Opinions about if fiscal policy or monetary policy is better will vary depending on who you ask. One country may benefit greatly with fiscal policy, while another may not. It all has to do with their economic system.

Monetary and fiscal policies of RBI during recession?

monetary and fiscal policy of rbi during recession

Differences between fiscal and monetary policy?

Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure. 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.

What are the tools of monetary and fiscal policy in India?

Monetary policy is a tool in India that is used the Reserve Bank to regulate interest rates. Fiscal policy in India is a tool that regulates their economy.

What is the difference between automatic and discretionary fiscal policy?

Discretionary fiscal policy requires deliberate government action. Automatic fiscal policy occurs automatically without (additional) congressional action.

Is monetary or fiscal policy more important?

With respect to the impact of governmental policies, there is a dispute as to the relative importance of monetary policy (controlling the money supply) and fiscal policy (government expenditures and taxes).

Easy difference between monitary and fiscal policy?

One easy way to remember it is that "monetary" deals with "money". In America, this is the Federal Reserve system and how they set interest rates, print money, etc etc. Fiscal policy is the actual spending and collection of taxes by Congress.

Why fiscal policy more effective than monetary policy?

They are the same

Does fiscal or monetary policy influence real GDP?

Both fiscal and monetary policy can affect real GDP, due to time-lag in wage and price adjustments. In general, however, fiscal policy has a much more direct effect on real GDP.

What is the differences in fiscal policy and monetary policy?

Fiscal policy deals with the taxation and spending practises of the government of a polity. Changing fiscal policy affects the level of taxation and spending a government conducts to enact its programs. Monetary policy deals with the production, distribution, and rules governing the use of money in a polity. Changing monetary policy affects the level and availability of the money supply (currency).

Who controls monetary and fiscal policy?

No one controls it. It is a combination of factors that figures into monetary and fiscal policy. There are world factors, the price of gold, world stock markets, wars, and other things determine policy.

What has the author B C Thaker written?

B. C. Thaker has written: 'Fiscal policy, monetary analysis, and debt management' -- subject- s -: Debt, Fiscal policy, Monetary policy

What has the author Chaman L Jain written?

Chaman L. Jain has written: 'Essentials of monetary and fiscal economics' -- subject(s): Fiscal policy, Monetary policy

What is the differences between fiscal policy and monetary policy?

Im trying to figure this one out but it basically goes as follows: fiscal is taxing and spending by the government in hopes to affect aggregate demand. Monetary policy is controlled by the FED here in the states and primarily involves the changes in interest rates and the money supply.

What has the author Alpo Willman written?

Alpo Willman has written: 'The effects of monetary and fiscal policy in an economy with credit rationing' -- subject(s): Credit, Fiscal policy, Mathematical models, Monetary policy

How do you distinguish fiscal policy from monetary policy?

Although both fiscal and monetary policy are used to influence the economy in a desired way, they are distinguishable based on who enacts them. Fiscal policy, or more specifically, discretionary fiscal policy, is the policy of the government, in terms of changing taxation or spending. If the government increases taxes (or decreases), that is a fiscal policy. Monetary policy is enacted by whoever controls the money supply of a nation. In the case of the United States, this is the Federal Reserve (our "central bank"). This acts, ideally, separately from the government. They can do things like increase/decrease the money supply with OMOs, change the reserve ratio, or change the discount rate; these three actions would be classified as monetary policy.

What has the author Alka Agarwal written?

Alka Agarwal has written: 'Inter-dependence of monetary & fiscal policies' -- subject(s): Fiscal policy, India, Monetary policy