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 policy decisions
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 goods and 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 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