Wednesday, July 20, 2011

Fiscal Policy Vs Monetary Policy

Once in a while pundits and gurus in the media discuss fiscal policy and the management of the US economy, and as a student of business in my early years I assumed that was the same as monetary policy. Now I know better - In essence, monetary policies are directed by a central bank, and fiscal policies come from the authority of a country's national government.

Fiscal Policy:

Simply stated, "Fiscal Policy" is defined as the governments ability to inflence the overall economy via expenditure and revenue collection. The government can spend more or less, and the government can increase or decrease taxes (revenues), borrow money, and sell fixed assets like government-owned land. Both of these "fiscal manipulations" (expenditure and revenue collection) can affect:

- "Aggregate Demand" - which is the total demand for goods and services at a point in time and a specific price level
- How resources are allocated within the economy
- How income is distributed among the population.

Fiscal policy can curb inflation, increase unemployment, and can maintain a proper (healthy) value of money.
Incidentally, John Maynard Keynes is widely credited to be the "Father" of fiscal policy.

Monetary Policy

"Monetary Policy" is more focused on the actual supply of money and targeting interest rates to grow and stabilize the economy. Monetary policy can either be referred to as expansionary or contractionary. Expansionary policy increases the total money supply more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even reduces it. In the US, the Federal Reserve system is the institution which is tasked with executing monetary policy. Othe "Central Banks" around the world are The Bank of England, the European Central Bank, , The People's Bank of China

Monetary policy can affect a number of economic factors, including:

- Economic Growth
- Inflation
- Exchange Rates with other currencies
- Unemployment

Monetary Policy has its roots in ancient China and other history, but one of the biggest "proponents" of Monetary Policy as a powerful tool in managing economy was Milton Friedman.

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