What is the difference between fiscal and monetary policies?

Both fiscal and monetary policies are demand-side policies used by authorities to either boost or decrease the aggregate demand of the economy. Aggregate demand (AD), consisted of consumption (C), investment (I), government spending (Gs) and net exports (exports (X) minus imports (M)), is the total planned spending on domestic goods and services at a given overall price level and in a given time period.

Fiscal policies are monitored by governments by changing taxation (T) and government spending (Gs). They can either be expansionary or contractionary. An expansionary fiscal policy would be used by governments to stimulate the economy by increasing government spending (Gs) and reducing taxation (T), whereas contractionary fiscal policy would be used to stagnate the economy by increasing taxation (T) and reducing government spending (Gs). On the other hand, monetary policies are implemented by central banks by monitoring interest rates (r) and the money supply. They can either be expansionary, also called loose, or contractionary, also called tight. Similar to the fiscal policies, an expansionary, or loose, monetary policy would be implemented to stimulate the economy, while a contractionary, or tight, monetary policy would be used to stagnate the economy. Loose monetary policies require a reduction in the value of interest rates (r) and thus, an increase of the money supply, while tight monetary policies require an increase of the interest rates (r) and hence, a reduction of the money supply. Therefore, the main differences between the fiscal and monetary policies is the authority that monitors them and the tools that it will use to implement them. 

Answered by Dimitris A. Economics tutor

6175 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

How does an Expansionary Fiscal Policy affect the Real GDP of an Economy?


How can expansionary fiscal policies support an economy in closing a deflationary/recessionary gap?


What is the difference between a monopoly and monopolistic competition?


If a country wishes to depreciate their own currency, how could they do so in terms of monetary policy? List three possible effects depreciating their currency will have on the economy.


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2024

Terms & Conditions|Privacy Policy