Question

Define at least three areas where monetary policy differs from fiscal policy. When would you use each?

Answer 1

Monetary Policy is mainly concern with the circulation of money supply in the economy and hence it deals with interest rates to expand and contract depending upon the economic scenario of the nation. Instruments through which monetary policy runs the nation are open market operations, statutory liquidity ratio, cash reserve ratio and repo and reverse repo rate. Fiscal Policy is mainly concern with public spending in the economy, and the measures to help the fiscal policy are the tax structures of the governments. Three specific areas where monetary policy differs from fiscal policy are; monetary policy changes depending on the economic behavior of the nation while fiscal policy changes once in a year. In other words, monetary policy is dynamic and quick in responding to the economy than fiscal policy. The second difference is monetary policy focuses on the economic stability by pegging back the prices while fiscal policy focuses on the growth of the economy. Monetary Policy has a long-term impact as it focuses on the money circulation in the economy while fiscal policy focuses on the impact of aggregate demand of the goods and services by utilizing its tax revenue and expenditure policies.