Fiscal Policy vs. Monetary Policy

     Fiscal and monetary policy are often used interchangeably; however, there are slight differences between the two.  Both fiscal and monetary policy can influence the economy, but they are implemented by different actors.  Monetary policy is implemented and altered by a central bank, whereas fiscal policy is implemented and altered by the government.  

     Monetary policy usually focuses on influencing the growth rate within a country.  Stimulative monetary policy should increase a country's growth rate.  Restrictive monetary policy slows down an economy to counterbalance inflationary factors.  In order to change monetary policy, the central bank can look towards interest rates or the amount of money in bank reserves.  The central bank in the United States is the Federal Reserve.  Once again, the chairwoman being the one and only Janet Yellen! (pictured below) 

Janet Yellen (chairwoman of the Federal Reserve)

The goal of monetary policy is to create maximum employment, which Janet Yellen has identified as one of her main goals as head of the Fed.  Monetary policy also works for instituting long-term moderate interest rates and stable prices.  The Federal Reserve uses three different methods of monetary policy.  These are 1) open market operations, 2) the discount rate, and 3) reserve requirements. Open market operations deal with the Fed buying and selling financial instruments, such as securities or enterprises.  When the Fed wants to increase the bank reserves, it buys securities and puts the deposit in the banks the Fed deals with.  When the Fed wants to decrease reserves, it sells those securities and takes out the deposit from the banks.  The discount rate is the interest rate banks use for short-term loans.  Reserve requirements are the amounts of deposits banks have to retain in reserves or with the Fed.

     Fiscal policy is how a government adjusts taxes and spending levels in order to make an effect on the economy.  Adam Smith introduced the idea of laissez-faire economics, in which the government plays a "hands-off" role in dealing with the economy.  However, after the Great Depression, the government began to play an increased role in our nation's economic status.  John Maynard Keynes engendered the idea of fiscal policy, which now follows Keynesian economics.  Keynesian economics explains that governments can play an active role by altering spending levels and tax rates.  Like anything else in life, a balance is necessary.  A common fiscal policy idea is decreasing taxes, which in turns puts more spending money into the economy.  By also increasing government spending, new businesses can arise, which can reduce unemployment levels.   
Shout out to Zachariah Chou for the request! #makingdollarsandsense