Difference between Fiscal Policy and Monetary Policy

Key Difference: Fiscal policies are the policies of the federal government related to the taxes, spending and debt management. They aim to promote the nation’s macroeconomic goals. Monetary policies are the policies of the government or central banks to control the money supply. These policies are used to establish a balance in the national income and growth in the economy.

Fiscal policy is an umbrella term used to refer to the policies of the federal government that are related to tax and mechanism of spending. These policies influence the aggregate demand in the economy.

Monetary policies are generally carried out by the central bank or the monetary authorities. These policies influence the direction of an economy by controlling the money supply.

Some of the differences are listed below:-

 

Fiscal Policies

        Monetary Policies

Definition

Fiscal policies are the policies of federal government related to the taxes, spending and debt management. They aim to promote the nation’s macroeconomic goals.

Monetary policies are the policies of government or central banks to control the money supply. These policies are used to establish a balance in the national income and growth in the economy.

Carried out by

Government

Generally by Central Bank/ Monetary Authority

Actions

Changing level of government spending

 

Changing levels of Taxation

Setting base interest rates

 

Influencing the supply of money

Time to implement

Comparatively more

Comparatively less

During Recession times

Generally more effective

Generally less effective

Impact on the composition of output

Affecting all sectors

Can be used to affect certain groups

Instruments

1. Reduction of Govt. Expenditure

2. Increase in Taxation

3. Imposition of new Taxes

4. Wage Control

5. Rationing

6. Public Debt

7. Increase in savings

8. Maintaining Surplus Budget

1. Bank Rate of Interest

2. Cash Reserve Ratio

3. Statutory Liquidity Ratio

4. Open market Operations

5. Margin Requirements

6. Deficit Financing

7. Issue of New Currency

8. Credit Control

Effective for

Economic growth

Stability

Flexibility

Comparatively less (Political reasons)

Comparatively more

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