Fiscal Policy vs Monetary
Policy
Fiscal Policy
• The word fiscal simply means “of or relating to government revenue or taxes”
•Fiscal Policy is the governments ability to increase or decrease taxes and increase or
decrease spending to influence the economy
•Ultimately, the federal government’s fiscal policy is the responsibility of Congress
•Most direct and effective means of influencing the economy
Monetary Policy
•The word monetary simply means “of or relating to money or currency”
•Monetary policy is the manipulation of the amount of currency in
circulation and the availability of credit in the economy as dictated by a
central bank
•In the case of the United States, the central bank that is responsible for
our monetary policy is the Federal Reserve (the Fed)
•Monetary policy is a more indirect way of managing the economy and
also has unintended consequences
Common Goals
•Ideally, both our fiscal and monetary policies work in unison to accomplish these
three goals:
1. Economic Growth- A nations wealth is often measured by
Gross Domestic Product (GDP) which simply means, the total
monetary value of all the goods and services produced by a
nation in any given year. So, a nations economic growth can be
monitored by following its GDP from year to year
-Last year U.S. GDP was 17.4 trillion, anything more
than that would be considered growth
Common Goals (cont)
2. Full Employment: A nation’s unemployment rate is a good indicator of the
health of a nations' economy. Generally, the lower the unemployment rate, the
healthier the economy
3.Price Stability: A slow rate of inflation is always the goal of both fiscal and
monetary policy as it is a sign of a growing economy. However, high inflation and
any deflation (except for perhaps after a time of excessive inflation) is a bad thing!
ex: If you went to the store in January to buy a light bulb and
it cost $3.42 it would not be abnormal for that same light
bulb to cost $3.47 in November. But if It was $5.00 or $2.00 that would not
be a sign of a healthy economy
So how do they achieve these goals?
•Fiscal Policy: There are two main theories when it comes to fiscal policy. Fiscal Conservatism and
Keynesian economics (after John Maynard Keynes)
•Fiscal conservatism takes the common sense approach. If your economy is not doing well, you cut
back (cut the budget) if your economy is doing well, you have more money to spend
•Keynesian economics says the exact opposite, if your economy is not doing well, you
•Monetary policy: The Federal Reserve uses alternative and less direct ways to influence the economy:
If the economy is down you put more money into circulation and lower interest rates so that people
can more easily borrow money
•When the economy is doing well and expanding too quickly, that is often a sign of over speculation
and often causes dramatic inflation. To combat this, the Federal Reserve will often raise interest rates
to make it harder to borrow money and take money out of circulation to slow down inflation