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You may have heard of Fiscal and Monetary Policy before, but have yet to understand what each of these terms means. Well, here is what they mean in essence:

  • Fiscal Policy: The government shifts tax rates and government spending in order to influence the Aggregate Demand in the economy
  • Monetary Policy: The Federal Reserve changes interest rates by either shifting the reserve requirement, the discount rate, or by engaging in open market operations in order to influence the money supply of the economy

Differences between Fiscal and Monetary Policy:

  • Fiscal Policy is enacted by the legislative branch of the government and is thus susceptible to public pressure 
  • On the other hand Monetary Policy is conducted by the Federal Reserve Board, which is under less public pressure as its members are not elected by the people. 
  • Fiscal Policy has a short response lag 
  • Monetary Policy has a long response lag. 
  • Response Lag refers to the amount of time a policy takes to have an effect on the economy. 
  • Fiscal policy is government policy - things like taxes and spending
  • Monetary policy is money based - it will impact interest rates and the money supply


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