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Pathp Words:57 A WS QUESTION 4 LE How does fiscal policy affect monetary policy? Can the fiscal policy create a challenge for
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Fiscal and monetary policy both affect the aggregate demand. They both are influencial in making a change in the consumer expenditure, investment expenditure, government expenditure and the net exports. The fiscal policy affects the aggregate demand through government spending and taxation. On the other hand monetary policy affects the aggregate demand by changing the interest rate through changing the money supply in the economy.

Fiscal policy and monetary policy work hand in hand. The main motive of any nation is to grow but keep the inflation rate in control. So when the government uses it's expansionary fiscal policy the central bank in order to control inflation changes it's monetary policy by changing the money supply. This way the fiscal policy affects the Monetary policy.

Yes the fiscal policy can create challenge for monetary policy and the central bank. When with a change in the fiscal policy the inflation rises or interest rate is affected, monetary policy is required to stabilize the economy by changing the money supply. The central bank has to change interest rates and the supply of money in the nation in order to stabilize. Thus a change in the fiscal policy can be challenging for the monetary policy and the central bank.

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