Monetary

and Fiscal
Policies
AERYLLE ROENZBEL G. DIEZ

JUDY F. SARMIENTO

FISCAL
POLICY
relates
togovernment
spendingandreve
nue collection.

MONETARY
POLICY

relates

to the supply
of money, which is
controlled via factors
such asinterest
ratesandreserve

COMPARISON
BETWEEN
FISCAL AND
MONETARY
POLICY

DEFINITIO
N

FISCAL
is

the use of
government
expenditure and
revenue collection
to influence the

MONETARY

is the process by which the

monetary authority of a country
controls the supply of money,
often targeting arate of
interestto attain a set of
objectives oriented towards the
growth and stability of the
economy.

PRINCIPLE

FISCAL

Manipulating
the
Manipulating
the

level

levelaggregate
demandin
of
the economy to achieve
economic objectives of
price stability,full
employment, and economic
growth.

MONETARY
Manipulating

the supply
of money to influence
outcomes like economic
growth, inflation,
exchange rateswith
other currencies and

POLICY
MAKER

FISCAL
Government

MONETARY
CentralBank(e.g.

Sentral)

Bangko

POLICY
TOOLS

FISCAL
Taxes;

amount of government
spending

MONETARY
Interest

rates; reserve
requirements; currency
peg; discount window;
quantitative easing;
open market operations;
signaling

POLICY
TOOLS
Both fiscal and monetary policy can

be eitherexpansionary
orcontractionary. Policy measures
taken to increase GDP
andeconomic growthare called
expansionary. Measures taken to
rein in an "overheated" economy
(usually when inflation is too high)
are called contractionary measures.

FISCAL POLICY
The

legislative
andexecutivebranches of
government control fiscal
policy. In the United States, this
is the President's
administration (mainly
theTreasury Secretary) and the
Congress that passes laws.

Policy-makers use fiscal tools

tomanipulate demandin the
economy. For example:

Taxes:

If demand is low,
the government can
decrease taxes. This
increases disposable
income, thereby
stimulating demand.

Spending:

If inflation is
high, the government can
reduce its spending thereby
removing itself from
competing for resources in
the market (bothgoods and
services).

Both toolsaffectthe fiscal position

of the government i.e.
thebudgetdeficit goes up whether
the government increases
spending or lowers taxes. This
deficit is financed by debt; the
government borrows money to
cover the shortfall in its budget.

Examples of monetary policy

tools include:
Interest

Rates: Interest rate is the

cost of borrowing or, essentially, the
price of money.
Reserve requirement: Banks are
required to hold a certain percentage
(cash reserve ratio, or CRR) of their
deposits in reserve in order to ensure
that they always have enough cash to
meet withdrawal requests of their
depositors.

Currency

peg: Weak economies

can decide to peg
theircurrencyagainst a stronger
currency.
Open market operations: The
Fed can create money out of thin
air and inject it into the economy
by buying government bonds (e.g.
treasuries).