Differences Between Fiscal and Monetary Policy

Both the policies are essential for effectively running a government and promoting its economy. However, it is critical to note that monetary policy alone will not affect an economy positively. It needs to work hand in hand with fiscal policies.

The fiscal policy Fiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more is a government initiative to implement tax reforms Tax Reforms Tax reform refers to the changes and amendments made in the nation’s tax structure or system to fix the loopholes and make it more efficient. It even ensures that there are fewer chances of tax evasion and avoidance by the taxpayers.read moreand change government spending to ascertain economic development. The finance ministry plans and influences government revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more and expenditure as part of the fiscal policy. It impacts government borrowings and budgets. Tools used under the fiscal policy are debt, tax rates, and public spending. For example, a government lowers tax rates if the consumption and demand are going down.

Conversely, monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more is a Central Bank’s measure to modify interest rates and regulate the money supply in the financial systemFinancial SystemA financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and assets between borrowers, lenders, and investors.read more. Thus, it affects banks’ lending, consumers’ purchasing power, the housing market, exchange rates, etc. The tools employed under this policy include the discount rate, open market operationsOpen Market OperationsAn Open Market Operation or OMO is merely an activity performed by the central bank to either give or take liquidity to a financial institution. The aim of OMO is to strengthen the liquidity status of the commercial banks and also to take surplus liquidity from them.read more, and reserve requirements.

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Fiscal Policy vs Monetary Policy Infographics

We will look at the top 8 differences between fiscal policy and monetary policy.

Key Differences

  • The fiscal policy ensures that the economy develops and grows through the government’s revenue collections and appropriate expenditure. On the other hand, the monetary policy provides liquidity, and the economy remains stable.Fiscal policy is controlled by the ministry of finance in the country. On the other hand, monetary policy is managed by the country’s Central Bank.The fiscal policy ensures the overall well-being of the economy. Therefore, monetary policy is a subset of fiscal policy.After reviewing the previous year’s results, fiscal policy is formed every year. Monetary policy is created as per the country’s economic conditions.Both can be used as expansionary and contractionary policies in different situations.Fiscal policy has a good political influence. However, monetary policy does not have a political impact.

Fiscal vs Monetary Policy Comparative Table

Conclusion

Both are very significant for economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more and development. However, both have different applications, merits, and demerits. The fiscal policy serves a country through its collections of money and the right expenditure. If the fiscal policy fails, it will also affect the monetary policy of the company.

On the other hand, monetary policy does not discuss growth or development. Rather, its primary purpose is to ensure enough liquidity to curb the inflation rate and reduce unemployment. Both have objectives, and to succeed as a growing economy, both should be formed appropriately.

This article is a guide to Fiscal policy vs Monetary Policy. We discussed the difference between fiscal and monetary policy using infographics and a comparison table. You may also look at the following articles to learn more: –

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