Monetary vs. Fiscal Policy

By Ezekiel Ahika3 min read · Posted Jun 23, 2023

435
Views

Monetary and fiscal policies are economic terms we hear on business news, read in papers, or learn in economics classes. Nevertheless, what do they mean?

In modern society, every advanced country attains sustainable growth through a direct approach to revenue accrual, budgeting, spending, money regulations, interest rates, and policies that manage demand and supply. All these make monetary and fiscal policy essential for every nation. As influential and correlated as both terms are, they have distinct meanings.

What Is Monetary Policy?

Monetary policy is a macroeconomic tool that a country's central bank or financial authorities adopt to regulate economic growth, prices of goods and services, and credit availability. Because it is macroeconomic in concept, it affects a region, nation, continent, or the globe.

The government of a nation applies monetary policies to control the circulation of money and interest rates in the country. It involves the increase or decrease of interest rates by the central bank. For example, a nation might be experiencing prevailing unemployment, widespread poverty, a recession, and a need for development. In that case, the government may cut interest rates so that citizens and residents can access loans for capital investments and reduce the cost of goods and services. This act is called expansionary monetary policy.

If there is a waste of resources, inflation, and over-accelerated economic growth, contractionary monetary policies, which are the opposite of expansionary monetary policies, are used to salvage the economy.

Monetary policy controls how individuals and businesses borrow, spend, save, and invest in an economic cycle. It also helps to prevent a recession in the long run.

What Is Fiscal Policy?

In modern times, when you hear the word fiscal policy, two things should come to mind: revenue (through taxation) and spending or expenditure. Fiscal policy is the increase or decrease of governmental taxation and expenditure from its treasury.

When there is a need to accelerate economic growth or curtail recession, the government increases its budgets and spends on activities that stimulate business growth. This action is called expansionary fiscal policy. For example, after the Great Recession of 2007–2009, the American government spent about $831 billion to finance the 2009 American Recovery and Reinvestment Act. The government used this fiscal policy to stimulate the economy by establishing healthcare, educational, and infrastructural facilities and tax reductions.

Fiscal policy also regulates the consumption of certain commodities in a country. For example, a government may increase taxes on the importation of certain goods to encourage local production and consumption of the same product. The government may curb inflation through fiscal policies. It involves increasing taxes to raise revenue for developmental budgets and reduce consumer spending. It is called contractionary fiscal policy.

Difference Between Monetary Policy and Fiscal Policy

Here are four significant differences between monetary policy and fiscal policy:

  1. Monetary policy involves managing economic activities, while fiscal policy is the taxation and expenditure of a nation.

  2. Monetary policy addresses how the central bank supplies money in an economy and the effect of the increase and decrease of interest rates, while the central focus of fiscal policy is taxation and spending.

  3. Monetary policy is primarily non-political, autonomous, and initiated by a country's central bank or financial authority. In contrast, fiscal policy involves the government's legislative and executive arms.

  4. Fiscal policy includes subsidies, tax relief, indirect taxes, expenditure, and welfare payments in a country. Monetary policy may include buying and selling Treasury bonds, discount rates, and banks' reserve ratios.

Conclusion

Monetary and fiscal policies help influence economic growth and increase the wealth of a nation. They help tackle economic issues such as recession, inflation, unemployment, and poverty.

References

About The Author

Ezekiel Ahika

4
Articles
5526
Total Views
7
Total Likes
0
Total Shares

I am Ezekiel Chidinma Ahika. I am a curious explorer, a researcher, a writer, and an editor. I have a Bachelor's degree in Education, English and Literature (B.A/Ed), and I am an Article Editor at Pitch Labs. I derive pleasure in writing educational content and teaching the things I know.

See more posts by Ezekiel Ahika

Comments

Your generosity fuels innovation and drives success!

Our resources are assembled by a team of entrepreneurs who donate their time and energy to Pitch Labs to ensure that entrepreneurial resources are available to everyone. Unfortunately, we can't avoid major expenses such as website hosting fees. To ensure our resources remain free to access and use, we rely on donors who are able and willing to give back. Consider donating to be a part of the Pitch Labs mission today!

More in Financial


Financial » Funding

Where To Find Resources To Benefit Your Small Business

by Callie Leff ·Apr 7, 2025

21
Views

Whether it’s grant opportunities or educational seminars, it can be difficult to know where to start your search for small business resources. Read this article for some great jumping off points! Read more

Financial » Economics

What is the Consumer Confidence Index?

by Warren Patterson ·Apr 2, 2025

20
Views

You'll learn what the consumer confidence index means and how to measure it. Also, you'll discover the factors affecting consumer confidence, and where to get information about current standing and trends. Read more

Financial » Investing

What are internal and external stakeholders?

by Aashna. Haryani ·Mar 31, 2025

21
Views

What are stakeholders? What/Who is an internal and external stakeholder? Why are they important? Read more

Financial » Accounting

What does a business's year look like (each quarter)?

by Zainab Anjum ·Feb 28, 2025

37
Views

This article offers key insights to shape a successful business year, quarter by quarter. Dive in to understand the essential elements that drive performance throughout the fiscal year. Read more

Recent articles


Marketing » Community

AI and the Future of Work: Will AI replace jobs in the future?

by Tonya Parker ·Apr 18, 2025

7
Views

AI’s impact in the workplace goes beyond taking jobs. Here’s what the experts say about how future generations will coexist with AI at work. Read more

Operations » Project Management Tools

What is Merchandising in Business?

by Sunnie Souza ·Apr 16, 2025

7
Views

Merchandising involves the mechanisms a business uses to advertise and sell their products. Merchandising can be done both online, or in person. Read more

Operations » Product & Service Management

Product Roadmaps: A Reference Guide

by Aashna. Haryani ·Apr 14, 2025

13
Views

This article talks about the product roadmap, its importance, and who owns it. It also talks about the different types of roadmaps and what drives them. Read more

Basics » Business Plans

What is an executive summary and why is it important?

by Callie Leff ·Apr 11, 2025

26
Views

An executive summary is a brief summary of the important points in your business plan. Learn how to write one here. Read more

Join Our Community


Looking for something else? Get your questions answered in our free online learning community!

Entrepreneurial Resources


Jumpstart your next business with our free resource library.

Disclaimer


Our organization cannot give out official legal/fiscal guidance. All articles are written by volunteers and it may be beneficial to contact professionals to assist your understanding of the information and to guide your action. Pitch Labs bears no responsibility for the results of actions taken based off of article content or any other form of assistance given.