Question

1. Explain the difference between Fiscal Policy and Monetary Policy.
2. What are some of the “tools” used to implement fiscal policy?
3. Cite at least two specific examples of action taken to implement fiscal policy (or at least attempted) in the past year. Who did what, how, and why?

Answer 1

1. Governments can influence economic performance by using combinations of monetary and fiscal policy. Monetary policy refers to the activities that are directed toward influencing the quantity of money and credit in an economy by the central bank. The policy's aim is to achieve macroeconomic objectives such as price stability, full employment, and stable economic growth. By contrast, fiscal policy refers to the government’s decisions about taxation and spending as it impacts a number of aspects of the economy such as the overall level of aggregate demand in an economy, the distribution of income and wealth among different segments of the population and hence, at last, the allocation of resources between different sectors and economic agents.

Both monetary and fiscal policies are used to regulate economic activity over time and can be used to accelerate growth when an economy starts to slow or to moderate growth and activity when an economy starts to overheat. In addition to this, fiscal policy can be used to redistribute income and wealth. Both the policies can alter aggregate demand of the economy if they work through different channels therefore the policies are not interchangeable, and they conceivably can work against one another unless the government and central bank coordinate their objectives for the economy.

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