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Fiscal policy and monetary policy

Fiscal policy and monetary policy are two tools that governments and central banks can use to influence the economy.

  1. Fiscal policy refers to the government’s use of spending and taxation to influence economic activity. Fiscal policy can be used to stimulate economic growth during a recession, or to slow down economic growth during a period of inflation.

Examples of fiscal policy tools include:

  • Changes in government spending: The government can increase or decrease spending on goods and services, such as infrastructure projects or military spending, to influence economic activity.
  • Changes in taxation: The government can increase or decrease taxes, such as income taxes or sales taxes, to influence economic activity.
  1. Monetary policy refers to the central bank’s use of interest rates and the money supply to influence economic activity. Monetary policy can be used to stimulate economic growth during a recession, or to slow down economic growth during a period of inflation.

Examples of monetary policy tools include:

  • Changes in interest rates: The central bank can increase or decrease interest rates, which can influence the cost of borrowing and the level of investment in the economy.
  • Changes in the money supply: The central bank can increase or decrease the amount of money in circulation, which can influence the level of spending and economic activity in the economy.

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