What is the difference between fiscal and monetary policies?

Both fiscal and monetary policies are demand-side policies used by authorities to either boost or decrease the aggregate demand of the economy. Aggregate demand (AD), consisted of consumption (C), investment (I), government spending (Gs) and net exports (exports (X) minus imports (M)), is the total planned spending on domestic goods and services at a given overall price level and in a given time period.

Fiscal policies are monitored by governments by changing taxation (T) and government spending (Gs). They can either be expansionary or contractionary. An expansionary fiscal policy would be used by governments to stimulate the economy by increasing government spending (Gs) and reducing taxation (T), whereas contractionary fiscal policy would be used to stagnate the economy by increasing taxation (T) and reducing government spending (Gs). On the other hand, monetary policies are implemented by central banks by monitoring interest rates (r) and the money supply. They can either be expansionary, also called loose, or contractionary, also called tight. Similar to the fiscal policies, an expansionary, or loose, monetary policy would be implemented to stimulate the economy, while a contractionary, or tight, monetary policy would be used to stagnate the economy. Loose monetary policies require a reduction in the value of interest rates (r) and thus, an increase of the money supply, while tight monetary policies require an increase of the interest rates (r) and hence, a reduction of the money supply. Therefore, the main differences between the fiscal and monetary policies is the authority that monitors them and the tools that it will use to implement them. 

Answered by Dimitris A. Economics tutor

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