Question

In: Economics

What is the difference between monetary and fiscal policy?

What is the difference between monetary and fiscal policy?

Solutions

Expert Solution

Fiscal policy is used by the government and for fiscal policy government either change government expenditure or change in the taxes.

Under contractionary fiscal policy, therefore government either decreases the government spending or increase tax.

Since the expansionary fiscal policy means either an increase in the government expenditure or decrease in the tax. This policy is used for increasing aggregate demand.

Monetary policy means change in the money supply by the Federal Reserve System for affecting the inflation.

An expansionary monetary policy is used for increasing aggregate demand. In this Central Bank of country increase the money supply which leads to decrease in the interest rate, so investment increases and aggregate demand also increase. This policy will be most ideal when there is high unemployment in the economy. The high unemployment could be reduced with the expansionary monetary policy.

When Fed use contractionary monetary policy, then money supply will decrease and money supply curve shifts leftward. Hence interest rate increases.


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