What is the difference between monetary policy and fiscal policy?
I hear these two terms thrown around quite a bit in the news, but I'm not sure how they're different. Are they the same thing?
Monetary policy, is under the control of the Federal Reserve. They could choose to raise or lower interest rates, increase the money supply, etc.
Fiscal policy, is Congress and the Executive deciding wether to increase or decrease spending, and where to allocate this spending.
Both monetary and fiscal policies are tools used by public authorities to bring stability in the economy. As rightly said by rickylicea, monetary policy is under the control of the Fed Reserve in US or the apex monetary authority like Central Banks in any other country. On the other hand, fiscal policy comprises the tools used by the government agencies such as Congress.
Fiscal policy tools like taxes, public borrowings, public expenditure etc are developed and sanctioned by the legislative sections of the government and are implemented by the executive branch. The basic purpose is to influence the production and consumption of goods and services in the economy. For example, taxes reduce private consumption and public expenditure increases consumption by providing income to the people. If there is a price rise, government may impose more taxes and incur less expenditure.
Monetary policy tools are bank rate and other credit control tools, open market operation of sale and purchase of assets by the Fed etc, through which the Fed tries to control the supply of money in the economy. Foe example, through bank rate rise, the interest rate increases and the credit becomes costlier. People are discouraged from consuming through borrowing. This way, the Fed tries to influence production and consumption through influencing the demand and supply of money.
A very simple explanation on both these policies are presented in a very recent hub http://tigresosal.hubpages.com/hub/What … l-Policies Although, FED is a part of the overall governance system, it is autonomous and independent from the elected bodies. Both types of economic policies have their own roles and limitations in managing smooth run of the economy.
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