Difference between Monetary Stimulus and Fiscal Stimulus

By : Neha Dhyani

Updated : May 17, 2022, 11:30

Monetary and fiscal stimulus are two of the main tools the Government has to fix the economy. These are the attempts by policymakers to boost the economy through a package of monetary and financial measures.

In this blog, we learn more about both these terms and the key Difference between Monetary Stimulus and Fiscal Stimulus.

What is a Monetary Stimulus?

A monetary stimulus involves the central bank either expanding the supply of money or reducing the cost of money or rate of interest to encourage consumer spending.

It measures the interest rates applicable for lending money in the economy.

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What is a Fiscal Stimulus?

A fiscal stimulus involves the Government taking various measures to stimulate the economy or cutting tax rates to put more money in the hands of consumers.

It provides the much-needed liquidity stimulus in the economy and helps revive a range of economic activities, especially during the economic slowdown.

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Key Difference between Monetary Stimulus and Fiscal Stimulus

Among some of the Key Differences between Monetary Stimulus and Fiscal Stimulus are -

Monetary StimulusFiscal Stimulus
Monetary stimulus is regulated primarily by central banks that focus on low inflation rates to stabilise the growth of the economy by increasing the amount of money availableFiscal stimulus is mainly a government-regulated measure that deals with changes in government spending and taxation to revive the economy
Monetary stimulus reduces interest rates and enhances the money supply by injecting more cash into the economyFiscal stimulus is a measure that is done by the government through direct spending and enhancing hiring to promote growth and employment
Monetary stimulus is undertaken by central banks to regulate the money supply in the country through interest ratesFiscal stimulus is used by the government to influence overall supply and demand by altering taxes, increasing spending and boosting overall economic growth
The monetary stimulus enables people to have access to extra money during times of recessionFiscal stimulus, on the contrary, is the last resort to achieve steady economic growth and price stability

In summary, monetary policy and fiscal policy refer to two different tools that can significantly impact the economic activity of a country. While monetary policies are managed by the central banks of a country and are concerned with the interest rates and management of money supply in an economy, fiscal policy is concerned with the way government manages various aspects of spending and taxation.

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FAQs on the Difference between Monetary Stimulus and Fiscal Stimulus

Q1. What is the Difference between Monetary Stimulus and Fiscal Stimulus in terms of how the government uses them?

The Difference between Monetary Stimulus and Fiscal Stimulus in terms of how the government uses them is as follows -

Central banks adopt a monetary stimulus policy to manage the money supply in the country with interest rates as a tool. In contrast, the government uses the fiscal stimulus to influence overall supply and demand by lowering taxes, increasing spending and boosting economic growth.

Q2. What is the Difference between Monetary Stimulus and Fiscal Stimulus in terms of how they work?

The Difference between Monetary Stimulus and Fiscal Stimulus in terms of how they work is as follows -

While monetary stimulus works by encouraging investments by businesses through the reduction in interest rates and enhancing the money supply by injecting more cash into the economy, fiscal stimulus works through direct spending and increasing the hiring process to promote growth and employment

Q3. What is the Difference between Monetary Stimulus and Fiscal Stimulus in terms of who controls them?

The Difference between Monetary Stimulus and Fiscal Stimulus in terms of who controls them is that the monetary stimulus is controlled by Central banks, which target low inflation, whereas the fiscal stimulus is a government-controlled measure that involves altering government spending and taxation to revive the economy

Q4. What is the Difference between Monetary Stimulus and Fiscal Stimulus in terms of what they do to achieve their objective?

The Difference between Monetary Stimulus and Fiscal Stimulus in terms of what they do to achieve their objective is as follows -

A monetary stimulus gives surplus money to people during times of recession. In contrast, fiscal stimulus is the last resort to achieve steady economic growth and price stability.