Question

What are the distinctions between monetary policy and fiscal policy? How does each of these policies affect your professional and personal lives?

Answer 1

Monetary Policy vs. Fiscal Policy: Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks, such as the U.S. Federal Reserve.

Fiscal policy is a collective term for the taxing and spending actions of governments. In the United States, the national fiscal policy is determined by the executive and legislative branches of the government.

• Both monetary and fiscal policy are maroeconomic tools used to manage or stimulate the economy.
• Monetary policy addresses interest rates and the supply of money in circulation, and it is generally managed by a central bank.
• Fiscal policy addresses taxation and government spending, and it is generally determined by government legislation.
• Monetary policy and fiscal policy together have great influence over a nation's economy, its businesses, and its consumers.

Effects of monetary policy : The monetary authorities of a country, the central banks control the supply of money mainly to boost the economy. Central banks have several of tools for controlling the money supply. For instance, central banks can increase or decrease the amount of reserves banks are required to maintain. This increases or decreases the amount of money banks have for lending to the public as loans. Central banks can also buy or sell financial instruments like bonds to increase or decrease the money supply. Central banks can also raise or lower interest rates to make loans expensive or cheap. Central banks can maintain tight, neutral or loose monetary policy depending on the performance of the economy. For instance, central banks tend to lower interest rates when there is poor economic growth. This encourages people to borrow since people have more access to cheap loans. This type of monetary policy is accommodative. Central banks can also take tight monetary policy stands. Monetary policy has a direct and indirect impact on personal finance. The direct impact revolves around the direction of interest rates while the indirect impact revolves around the expectations of economic players. When central banks raise interests, the cost of credit also increases as lenders increase the interest rates charged on loans. New, as well as existing loans, become more expensive. In regards to expectations, potential investors who depend on loans are bound to slow down or stop investing when the cost of loans increases. Monetary policy also has an effect on asset classes such as bonds, equities, real estate, commodities, and currencies. In real estate, for instance, high-interest rates tend to make mortgages expensive.

Effects of fiscal policy: Since fiscal policy is simply about how the government decides to spend money as well as the tax rates/rules it puts in place, fiscal policy has a significant impact on the personal finances of citizens in a country. Government spending takes many forms varying from government investments in development to spending on social security payments, welfare, etc.When a government spends more on development, there is a positive impact on the economy. For instance, more jobs are created, and citizens have more money in their pockets to spend on goods and services. When people have more money, they are able to support small businesses which are the main drivers of the economy. The opposite happens when the government lowers spending on development. Unemployment is bound to rise. The price of goods and services also rises making life expensive.The government’s stand on taxes also has a direct impact on your personal finance. When the government lowers income tax, for instance, citizens have more money to spend on goods and services. This, in turn, propels the industries that make those goods and services boosting the economy in the process. When the income tax is too high, citizens have less money in their pockets which reduces their buying power and slows down the economy.