{"id":1160,"date":"2019-10-10T20:04:00","date_gmt":"2019-10-10T20:04:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1160"},"modified":"2026-03-23T17:44:50","modified_gmt":"2026-03-23T17:44:50","slug":"compare-monetary-and-fiscal-policy-to-influence-economic-activities","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/compare-monetary-and-fiscal-policy-to-influence-economic-activities\/","title":{"rendered":"Compare Monetary and Fiscal Policy"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Identify which is not an instrument of monetary policy\",\n    \"text\": \"Which of the following is least likely an instrument of monetary policy?\\n\\nA. Change in reserve requirements\\n\\nB. Decisions about taxation and spending\\n\\nC. Open market operations\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B.\\n\\nDecisions about taxation and government spending are tools of fiscal policy, not monetary policy.\\n\\nA and C are incorrect because reserve requirements and open market operations are standard instruments of monetary policy.\"\n    }\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Monetary and Fiscal Policy (2022 Level I CFA\u00ae Exam \u2013 Reading 12)\",\n  \"description\": \"This video lesson covers key concepts in monetary and fiscal policy, including money creation, the Fisher effect, functions of money, central bank roles, inflation types, policy tools, the monetary transmission mechanism, and fiscal policy challenges. It also explores how debt, interest rates, and coordination between policies affect economic stability.\",\n  \"uploadDate\": \"2018-11-12T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/KKHi1HKTpD4\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=KKHi1HKTpD4\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/KKHi1HKTpD4\",\n  \"duration\": \"PT29M18S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/KKHi1HKTpD4?si=dB8vOXQvJ6yCWfN3\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>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.<\/p>\n<p>Both monetary and fiscal policies have an overall objective of creating 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.<\/p>\n<h2><strong>Monetary Policy<\/strong><\/h2>\n<p>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.<\/p>\n<h3><strong>Instruments of Monetary Policies<\/strong><\/h3>\n<p>Monetary policies use quite a number of instruments through central banks to accomplish their objectives. Some of them include:<\/p>\n<ul>\n<li>interest rates;<\/li>\n<li>open market operations;<\/li>\n<li>bank reserve requirements; and<\/li>\n<li>selective credit controls.<\/li>\n<\/ul>\n<h2><strong>Fiscal Policy<\/strong><\/h2>\n<p>Fiscal policy refers to government decisions on taxation and spending. These decisions affect a number of factors in the economy, including:<\/p>\n<ul>\n<li>the distribution of wealth and income across different parts of a country;<\/li>\n<li>the allocation of resources in all sectors of the economy; and<\/li>\n<li>the aggregate demand for goods and services and, therefore, the level of economic activity.<\/li>\n<\/ul>\n<h3><strong>Roles and Objectives of Fiscal Policies<\/strong><\/h3>\n<p>The primary goal of the fiscal policy is to control the economy of a given country by influencing the total national output (GDP).<\/p>\n<h2><strong>Similarities Between Monetary Policies and Fiscal Policies<\/strong><\/h2>\n<ul>\n<li>They are both macroeconomic tools;<\/li>\n<\/ul>\n<ul>\n<li>They are policies geared towards the attainment of economic stability and growth; and<\/li>\n<\/ul>\n<ul>\n<li>They are both government policies.<\/li>\n<\/ul>\n<h2><strong>Differences Between Monetary Policies and Fiscal Policies<\/strong><\/h2>\n<ul>\n<li>While monetary policies are government policies implemented through the central bank, fiscal policies are implemented by the government&#8217;s policy-makers through laws.<\/li>\n<\/ul>\n<ul>\n<li>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.<\/li>\n<\/ul>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following is <em>least likely<\/em> an instrument of monetary policy?<\/p>\n<p>A. Change in reserve requirements<\/p>\n<p>B. Decisions about taxation and spending<\/p>\n<p>C. Open market operations<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is B.<\/p>\n<p>Decisions about taxation and spending is a tool used in fiscal policy through government policies.<\/p>\n<p>Options A and C are incorrect. Changes in reserve requirements, open market operations, selective credit controls, and bank rate variation policies are all monetary policies.<\/p>\n<\/blockquote>\n<p><em>Reading 16 <\/em><em>LOS 16a: <\/em><\/p>\n<p><em>Compare monetary and fiscal policy.<br \/><\/em><\/p>\n<div class=\"notes_inv\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>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,&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1160","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Monetary vs. Fiscal Policy | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Monetary and fiscal policies influence macroeconomic variables and financial markets through interest rates, government spending, and taxation policies.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/compare-monetary-and-fiscal-policy-to-influence-economic-activities\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Monetary vs. Fiscal Policy | CFA Level 1 - 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