Limited Time Offer: Save 10% on all 2022 Premium Study Packages with promo code: BLOG10

Comparison of Monetary and Fiscal Policy

Comparison of Monetary and Fiscal Policy

Monetary policy and fiscal policy refer to government policies and tools used to control macroeconomic variables and financial markets. Whenever economic activities start to slow down, these tools are used to accelerate growth. Similarly, when the economy starts to overheat, they moderate inflation.

Both monetary and fiscal policies aim to create an economic environment where growth is positive and stable. Inflation should be stable and low. In such a good economic environment, corporations can focus on their investment decisions. They can maximize profits for their shareholders. Households, on the other hand, can feel secure with their savings.

Monetary Policy

Generally, monetary policy refers to the actions of a central bank that are aimed at determining or influencing the money supply within the economy. Also, one of the major objectives of monetary policy is to ensure financial and price stability.

Instruments of Monetary Policies

Monetary policies use quite a number of instruments through central banks to accomplish their objectives. Some of them include:

  • interest rates;
  • open market operations;
  • bank reserve requirements; and
  • selective credit controls.

Fiscal Policy

Fiscal policy refers to government decisions on taxation and spending. These decisions affect a number of factors in the economy, including:

  • the distribution of wealth and income across different parts of a country;
  • the allocation of resources in all sectors of the economy; and
  • the aggregate demand for goods and services and, therefore, the level of economic activity.

Roles and Objectives of Fiscal Policies

The primary goal of the fiscal policy is to control the economy of a given country by influencing the total national output (GDP).

Similarities Between Monetary Policies and Fiscal Policies

  • They are both macroeconomic tools;
  • They are policies geared towards the attainment of economic stability and growth; and
  • They are both government policies.

Differences Between Monetary Policies and Fiscal Policies

  • While monetary policies are government policies implemented through the central bank, fiscal policies are implemented by the government’s policy-makers through laws.
  • Monetary policies use tools such as bank rate variation policies, open market operations, changes in reserve ratios, and selective credit controls for implementation. In contrast, fiscal policies use tax and government expenditure as tools for implementation.


Which of the following is least likely an instrument of monetary policy?

C. Open market operations.

A. Change in reserve requirements.

B. Decisions about taxation and spending.


The correct answer is C.

Decisions about taxation and spending is a tool used in fiscal policy through government policies.

A and B are incorrect. Changes in reserve requirements, open market operations, selective credit controls, and bank rate variation policies are all monetary policies.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop GMAT® Exam Prep

    Sergio Torrico
    Sergio Torrico
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.