Monetary and Fiscal Policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.
Monetary policy is referred to as either being
- Expansionary
- Contractionary
An Expansionary policy increases the total supply of money in the economy more rapidly than usual, and Contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. Fiscal policy refers to the use of the government budget to influence economic activity.
A comparison of the two is given in the table below:
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