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