Monetary Policy Vs Fiscal Policy: A Comparison

Monetary policy and fiscal policy are the two most widely recognised tools used to influence the country'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 (Fed). Fiscal policy is a collective term for the taxing and spending actions of governments.

 

Learning the distinction between fiscal and monetary policy is critical for knowing who does what in the federal government and the Federal Reserve. The short answer is that fiscal policy is carried out by Congress and the administration, whereas monetary policy is carried out by the Federal Reserve.Both sorts of policies can have a big impact on our daily lives, but the distinctions between them can be fuzzy to the typical consumer.

 

What do you mean by Monetary Policy?

 

The term "monetary" refers to anything involving money. Monetary policy is a central bank's primary function.

 

Monetary policy refers to the measures that central banks take to achieve goals such as price stability, full employment, and stable economic growth. When we say pursue, we mean on a large scale—the macroeconomic scale.

 

Monetary policy refers to the activities taken by a central bank, such as the Federal Reserve in the United States, to regulate the amount of money and credit in the economy. Fiscal policy refers to the use of government expenditure and taxes to influence economic activity. Fiscal policy is to encourage both economic growth and stability.

 

Monetary policy is concerned with controlling the amount of money available in an economy as well as the channels through which new money is provided. Economic statistics such as GDP, inflation rate, and industry and sector-specific growth rates all have an impact on monetary policy strategies.

 

Also Read | Monetary Policy and Central Banks: Managing the Economy

 

What do you mean by Fiscal Policy? 

 

Fiscal policy is the employment of government spending and tax policies to influence economic conditions, specifically macroeconomic factors. These include the overall demand for products and services, employment, inflation, and economic growth.

 

During a recession, the government may reduce taxes or increase spending to boost demand and economic activity. In contrast, to battle inflation, it may raise interest rates or reduce spending to slow the economy.

 

Fiscal policy refers to the government's spending and tax policies for guiding the economy. Governments frequently utilize fiscal measures in conjunction with monetary policy to achieve economic policy goals, which include: Full employment, A rapid rate of economic expansion,Fiscal policy refers to the government's spending and tax policies for guiding the economy. Governments frequently utilize fiscal measures in conjunction with monetary policy to achieve economic policy goals, which include: Full employment, A rapid rate of economic expansion, Stable prices and wages

 

Government taxes and spending are the major means for implementing fiscal policy. Lowering taxes, for example, can boost consumer spending (consumption) and company investment. These elements can boost the economy. Government spending on public works can also contribute to economic growth.

 

Differentiating factors between Monetary and Fiscal policy

 

Monetary policy refers to the activities taken by a central bank, such as the Federal Reserve in the United States, to regulate the amount of money and credit in the economy. Fiscal policy refers to the use of government expenditure and taxes to influence economic activity. Fiscal policy is to encourage both economic growth and stability.

 

Let's discuss some of the major differentiating factors for both:

 

1. Definition

 

Monetary Policy  is a financial technique used by central banks to regulate the flow of money and interest rates in an economy. Fiscal Policy  is a financial tool that the central government uses to manage tax revenues and policies connected to spending for the benefit of the economy.

 

2. Purpose

 

Monetary policy aims to achieve price stability, sustainable economic growth, employment management, and inflation control. Fiscal policy is to promote economic growth and development of the country.

 

3. Measures

 

Monetary policy It assesses the interest rates for lending money in the economy. Fiscal policy , It measures an economy's capital expenditures and taxes.

 

4. Tools Used 

 

Monetary policy uses many methods such as reserve requirements, discounted rates, credit ratios, reserve interest, and open market activities.The primary tools for fiscal policy are public spending, demonetization, and taxes.

 

Monetary policy typically has a broad economic impact. Meanwhile, fiscal policy frequently exerts less effective influence on economic patterns. However, both monetary and fiscal policy can boost or depress economic growth by enacting measures that tend to increase or decrease expenditure in the economy.

 

Consumers are affected by both fiscal and monetary policies. Fiscal policy can enhance employment and income by increasing the government or lowering taxes for lower-income earners. Monetary policy can have an impact on your stock portfolio and interest rates if you are thinking about getting a mortgage. When interest rates are low, real estate sales increase because purchasers can afford a larger mortgage. When interest rates go down, cash and other commodities can become better investments.

 

Also Read | What is Fiscal Policy?

 

Bottom Line

 

Monetary policy is most commonly employed to "fine-tune" the economy. Making small changes to interest rates is the most straightforward strategy to impact the economic cycle. Deflationary fiscal policy is extremely unpopular.However, in some cases, monetary policy has limitations. In severe recessions, a combination of two programmes may be necessary.

 

However, in some cases, monetary policy has limitations. During severe recessions, a combination of the two programmes may be required.

 

Monetary and fiscal policy tools work together to keep economic growth stable, resulting in low inflation, unemployment, and price stability. Unfortunately, no silver bullet or generic plan can be implemented because each collection of policy tools has advantages and disadvantages. When used correctly, however, the net benefit to society is beneficial, particularly in reviving demand after a crisis.

Also Read | The Crucial Role of Government in Economic Policy and Regulation