Differences between Fiscal Policy and Monetary Policy

The Main Differences between Fiscal Policy and Monetary Policy are discussed below

Fiscal policy refers to the revenue and expenditure policies of the government and helps to correct the situations of excess and deficient demands. It is also called the budgetary policy of the government.

Monetary policy is the policy of the Central Bank which is introduced with the objective to control the country’s money supply including currency, demand deposits, and foreign exchange rates. Monetary management is very essential for the smooth functioning of an economy. This policy seeks to influence the total demand by influencing the amount and cost of credit available to the borrowers.

Differences between Fiscal Policy and Monetary Policy

Fiscal PolicyMonetary Policy
Fiscal policy affects the revenue and expenditure of the government.Monetary policy affects the aggregate supply of money in an economy.
Fiscal policy instruments are government
expenditure, imposition of taxes, subsidy provision, and public debt.
Monetary policy instruments are bank rate, statutory liquidity ratio, cash reserve ratio, and differential interest rates.

Components of Fiscal Policy

  • Government expenditure is increased to adjust deficient demand and decreased to adjust excess demand.
  • Tax burden is decreased to adjust deficient demand and increased to adjust excess demand.
  • Public borrowing is increased to adjust excess demand and decreased to adjust deficient demand.
  • Borrowing from RBI is increased to adjust deficient demand and decreased to adjust excess demand.

Also, Read