Fiscal Policy vs. Monetary Policy

Main Difference

The economic stability is one of the main objectives of every of the state as one country can’t have the peace and harmony without having control on the unemployment, poverty, and inflation like issues. To achieve the economic stability different policies are prevalent in the country. Fiscal and monetary policies are two such policies that have the similar objective to create an economically stable environment. As both have the similar aim, people found it difficult to differentiate between both these policies. The fiscal policy is administered and announced by the Ministry of Finance; it gives detailed policy regarding the revenue generated through taxes and the public expenditure for the upcoming year through this. On the other hand, the monetary policy is announced by the central bank to control and regulate the money supply within the economy. The fiscal policy directly tells about the economic growth of the country, whereas the monetary policy is more concerned with the economic stability of the country.

Difference Between Fiscal Policy and Monetary Policy

Comparison Chart

What is Fiscal Policy?

The fiscal policy is the economic policy defined by the Ministry of Finance on a yearly basis. It is the record of the revenue generated through taxes and its division for the different public expenditures. The fiscal policy directly defines the economic growth of the country and also shows the performance of the political party regarding the economics. The political party’s priority and policies directly affect the fiscal policy. If a political party in the regime has education has priority, the more the revenues will be used in the education sector. And if the health is the top priority of the political party, the more revenues will be utilized in the health sector. The fiscal policy is initiated by the Ministry of Finance through budget every year. When the revenue exceeds the expenditure than it is called the fiscal surplus, and if the revenue is less than the expenditure than this type of financial policy is known as the fiscal deficit. The deficit shows the poor performance of the economic sector, whereas the surplus shows the good performance of the economic sector by the ruling party. The economic growth directly eliminates the economic troubles like unemployment, poverty, and the inflation. The fiscal policy also defines the volume of the taxes to levied on the people in the coming fiscal year. The policy in which government reduces or minimizes the taxes is known as the Expansionary Fiscal Policy. Contrary to this, the policy in which government increases the taxes on the people is known as the contractionary fiscal policy. The increase or decrease in the tax rate is made after keeping in mind the economic growth of the country.

What is Monetary Policy?

The monetary policy is the economic policy set by the central bank of the country; it maintains and regulates the money supply within the economy. As the monetary policy is more associated with the concept of the economic stability, the change in it comes after the economic condition of the country changes. Unlike the fiscal policy, the monetary policy is not initiated on a yearly basis; it directly depends on the economic status of the nation. The main aim of this policy is to make sure the money supply within the economy efficiently through which the strengthening of the banking system takes place, control on inflation and the economic growth take place. The interest and the credit ratios on the money are defined through this policy. The policy through which the money supply is increased after making the reduction in the interest rates is known as the Expansionary Monetary Policy. On the other hand, the policy through which the money supply is decreased with making an increase in the interest rates is called the Contractionary Monetary Policy.