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Fiscal Policy V/S Monetary Policy - - The Difference

Fiscal Policy V/S Monetary Policy - - The Difference

Monetary Policy is being implemented by the central bank i.e. the RBI where as the Fiscal policydecisions are set by the National Govt. Both these policies are adopted to control the economic growth

of the country.

A monetary policy is expected to improve the economy's rate of growth of output ( which is measured

by GDP. Tight or restrictive monetary policy is designed to slow the economy in the future to offset

inflationary pressures. Likewise, fiscal policies, tax cuts, and spending increases are normally expected

to stimulate economic growth in the short run, while tax increases and spending cuts tend to slow the

rate of future economic expansion.

Fiscal Policy and Monetary Policy both are the major terms used in the economics and both deal in the

overall demand and supply of India.

Fiscal policy deals in govt. spending and revenue collection by the way of tax. Whereas Monetary

Policy is a process which controls the demand and supply of money.

Fiscal Policy can affect monetary policy. Fiscal policy can affect the inflationary rates also through its

effect on aggregate demand. For E.g. As now we know that fiscal policy deals in govt. spending and

taxation, so if govt. start levying extra tax then the consumer will have less money in their hands and

thus less spending. Less spending means less demand that means more supply and less demand

which will ultimately result in cheaper goods and thus the inflation rates will start to lower. This is only

the one case I have explained which can be in either case as well. That means if more liquidity is in

the market then more money will be there in the hands of the consumer which will surge the demand

and when too much of money is running for too few goods this will result in higher prices of the goodsand thus higher inflation.

Now coming to monetary policy, it is an instrument used by the govt. to influence the economic

growth, inflation, exchange rates, as well as unemployment rate of the country.

Monetary Policy is been referred to as expansionary or contractionary policy.

Contractioanry policy is adopted when govt. want to control the higher inflation rate for which govt.

reduces the money supply or raises the interest rate.

Expansionary policy is adopted when there is a liquidity crunch or when there is lack of money supply

for which size of the money supply is increased or interest rates are decreased.

For fiscal policy there are three possible positions:

1. Neutral Position

2. Expansionary Position

3. Contractionary Position

A Neutral position applies when the budget outcome has neutral effect on the level of economic

activity where the govt. spending is fully funded by the revenue collected from the tax.

An Expansionary position is when there is a higher budget deficit where the govt. spending is higher

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than the revenue collected from the tax.

An Contractionary position is when there is a lower budget deficit where the govt. spending is lower

than the revenue collected from the tax.