Economic stability is the most important thing for any county in the world. Central banks, Governments often intervene in their economies in an attempt to maintain the economic stability. So to maintain the economic stability, fiscal and monetary policies plays a major role in it.
In most of the economies the objective of fiscal policy is to increase the output of the country while the monetary policy deals with the control of interest and inflation rates. In some countries the fiscal policy is controlled by the government and monetary policy is controlled by the central bank and in some countries both the policies are controlled by the government, but irrespective of the control authority the overall impact on the economy made by both these policies are in general similar. Now let’s understand both of them one by one.
Fiscal policy is mainly controlled by the government of that particular country. In order to stimulate growth in the economy the government will try to cut taxes and increase its spending for goods and services. Decrease in taxes and increase in government spending will increase the aggregate demand now to meet the increasing demand companies need to produce more goods or in other words increase production this will require more labour force which will ultimately increase the employment. As more people are employed, they will earn more money and this money they will spend on goods and services. Further increase in demand will require more production and in this way the economic growth will continue. So government spending tends to speed up the economic growth of the country. On the other hand, if the economy is overheating or growing too fast, then the government will act the opposite way. They will increase the taxes and decrease the government spending and this will result in a decrease in demand for goods and services so now companies will reduce their production and so they may