Question

Contrast fiscal policy and monetary policy, and explain how each affects the economy.

Answer 1

Fiscal policy is when the government increase or decrease the spending and the taxes in the market. if contractionary i.e. an increase in the taxes and decrease in the spending will decrease the output and demand in the economy and an expansionary policy i.e. a increase in the spending and decrease in the taxes will increase the output.

Monetary policy work on the similar lines but it is an increase or decrease in the money supply in the market. an increase in the money supply will increase the demand and decrease in the money supply will decrease the demand.

The major difference between the two is that the monetary policy is very quick to act and fiscal policy suffers certain lags. Moreover, fiscal policy will lead to a crowding out and monetary policy doesn't.