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How does fiscal policy differ from monetary policy?

Danna Linch

Fiscal policy and monetary policy are two important ways that governments try to keep the economy healthy. But they are different things.

Fiscal policy is like Mom and Dad giving you an allowance. They decide how much money you get each week, and you have to use it wisely. The government does the same thing with the economy. They make decisions about how much money to spend and how much to save. They also decide how much money to collect in taxes.

Monetary policy is more like a piggy bank. If you have a piggy bank, you can decide how much money to put in it and how much to take out. The government does the same thing by controlling how much money is in the economy and how much is available for banks to loan out. By changing interest rates or buying or selling government bonds, the government can affect how much money is in circulation.

So, they both sound similar, right? But the main difference is that fiscal policy is all about government spending and taxes, while monetary policy is all about controlling the money supply.

For example, let's say the economy isn't doing so well. Unemployment is high, and people aren't spending as much money. The government might use fiscal policy to try to fix things. They could spend more money on things like building roads or schools, which would create jobs and get people spending again. Or they could lower taxes so that people have more money to spend.

On the other hand, if inflation is getting too high, the government might use monetary policy instead. They could raise interest rates, which would make it more expensive to borrow money and reduce spending. Or they could sell government bonds to take money out of circulation, which would also reduce spending.

So, in summary, fiscal policy is all about government spending and taxes, while monetary policy is all about controlling the money supply. Both are important tools for governments to keep the economy healthy, but they are used in different situations to achieve different goals.