Monetary and Fiscal Policy: What's the Difference?

Monetary policy refers to how a government controls its economy by regulating the currency flow. Increasing or reducing currency flow can speed up or lower the economy. A central bank makes these policies, and in this case, the Federal Reserve System serves as the central bank for the U.S. this system is comprised of The Federal Reserve Board and The Federal Open Market Committee. Even though the president appoints the system, it is independent and free from the government (CrashCourse, 2016). The primary function of the Fed is to regulate inflation and lower unemployment. The Fed accomplishes its duties in several ways. One significant way it does so is regulation of the rates of interest. If the Fed lowers the rates of interests, there will be more money for banks to lend therefore more people will take up loans and hence increasing the amount of money circulating. If interest rates are high, there will be less money circulating as most people will not take up loans. When the Fed raises the discount rates for banks, there will be less money hence the banks raise their interest rates and this leads to less borrowing. However, if the discount rates are low, there is more money in the banks leading to competition among banks hence lower interest rates and consequently more borrowing (CrashCourse, 2016). Even though not necessarily, low rates of interests heighten inflation and The Fed introduces higher interests to cool down inflation. The open market committee is in charge of deciding on how many government bonds are bought or sold. The more the bonds purchased by The Fed, the more circulation of Currency. 

Fiscal policy, on the other hand, refers to how the government collects and spends its revenue. The government makes these policies. There are two ways that the government contributes to the economy through the fiscal policies. These are by reducing or increasing tax rates or by reducing government spending. Reduction of taxes means that people will spend more and more investments in the business sector hence economic growth. The government earns 43% to 50% of its income from taxes (CrashCourse, 2016). However, the government mostly spends more than it has which leads to deficits. Reducing spending or raising tax rates is the solution to this problem. The government can cut its spending on discretionary spending such as cutting money set for defense, healthcare, and education. 

Reference 

CrashCourse. (2016).  Monetary and Fiscal Policy . youtube: CrashCourse.