Question

Please explain the difference between monetary policy and fiscal policy

AS detail as possible

Thanks

Answer 1

Monetary policy and fiscal policy referred to the two most widely recognised tools used to influence the Nations economic activity monetary policy is primarily concerned with management of interest rates and the total supply of money in circulation and in general carried out by central banks such as US Federal Reserve fiscal policy is a collective term for the taxing and spending across of governments in United States the national fiscal policy is determined by the executive and legislative branches of the government

Monetary policy

Central banks have typically used monetary policy to either stimulate an economy or to check its growth theory is that by incentivizing individuals and business to borrow and spend monetary policy can spur economic activity conversely by restricting spending and incentivizing savings monetary policy can act as a break on inflation and other issues associated with an overheated economy. The Federal Reserve also known as Federer has frequently used 3 different policy tools to influence the economy open market operations changing reserve requirements for banks and setting the discount rate open market operations are carried out on a daily basis where the Federal Reserve buys and sells U. S Government Bonds to either inject money in the economy or to pull money out of the circulation by setting the reserve ratio of the percentage of deposits that banks are required to keep in reserve the Federal Reserve directly influences the amount of money created when Bank makes loan the Federal Reserve can also target changes in the discount rate which is intended to impact short term interest rates across the entire economy.

The aim of most government fiscal policies is to target the total level of spending the total consumption of spending or both in an economic the two most widely used means of affecting fiscal policy at changes in government spending policies are in government tax policies if a government believe that there is not enough business activity in an economy it can increase the amount of money it spends often referred as stimulus spending if there are not enough tax receipts to pay for the spending increases government borrow money by issuing debt securities such as Government Bonds and interest accumulate debt this is known as deficit spending. By increasing taxes government pull money out of the economy and slow business activity but typically fiscal policy is used when the government seeks to stimulate the economy it might lower taxes or other tax rebates in an effort to encourage economic growth influencing economic outcomes via fiscal policy is one of the core tenets of economics. When government spends money or changes tax policy it must choose whether and where to spend what to text in doing so government fiscal policy can target specific communities Industries investments or commodities to favour or discourage production and some its action based consideration that are not entirely economic for this reason the numerous fiscal policy tools are often hotly debated among economics and political observers.

In terms of improving the real economy expansionary fiscal policy is more effective in terms of financial economy expansionary monetary policy is a better choice both types work through different channels and impact individuals and cooperation in different ways

Fiscal policy affects consumers positively for the most part as it leads to increased employment and income essentially it is targeting aggregate demand companies also benefit as they see increased revenues however if the economy is near full capacity expansionary fiscal policy risk sparking inflation disinflation eats away at the margin of certain corporations in competitive Industry that may not be able to easily pass on cost of consumers it also its at the fun of people on a fixed income fiscal policy can also have effect of creating acid Bubbles if the market and incentive become too distorted. Monetary policy has less impact on the real economy The Great Depression during which the federal reserve was particularly aggressive on a historical scale its action prevented deflation and economic collapse but it did not generate significant economic growth to reserve The Lost output and jobs expansionary monetary policy can have limited effects on growth by increasing asset prices and lowering the cost of borrowing making companies more profitable in addition it has the psychological benefits of taking worse case economic scenarios of the table as with fiscal policy extended periods of low balling cost can create asset Bubbles that are only Apparent in Hind sight.

Another crucial difference between the two ways that fiscal policy can be targeted while monetary policy is more of blend tool in the terms of expanding and contracting the money supply to influence inflation and growth.

Monetary policies typically implemented by Central Bank why fiscal policy decisions are set by the national government however both monetary and fiscal policy may be used to influence the performance of economy in the short.

Both fiscal and monetary policy at demand side policy used by authorities to either boost or decrease the aggregate demand of the economy fiscal policies are monitored by the government by changing taxation in government spending they can either be expansionary or contrary the main difference between the fiscal and monetary policy is the authority that that morning monitors them and the tools that it will used to implement them.