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Difference Between Monetary Stimulus and Fiscal Stimulus – Monetary Policy vs Fiscal Policy

By BYJU'S Exam Prep

Updated on: September 6th, 2023

The difference between Monetary Stimulus and Fiscal Stimulus is that a central bank manages monetary stimulus, which deals with interest rates and the amount of money in circulation. Fiscal stimulus determines Government legislation, which deals with taxation and spending. Monetary and fiscal stimulus are two of the main tools the Government has to fix the economy.

Difference Between Monetary Stimulus and Fiscal Stimulus PDF

These are the attempts by policymakers to boost the economy through a package of monetary and financial measures. There exists a difference between Monetary Stimulus and Fiscal Stimulus. However, the management of the economy is greatly influenced by both monetary stimulus and fiscal stimulus, both of which have both direct and indirect effects on the finances of individuals and households.

Difference Between Monetary Stimulus and Fiscal Stimulus

Monetary and fiscal stimulus are two different tools that can significantly impact a country’s economic activity. The difference between monetary stimulus and fiscal stimulus is given below.

Monetary Policy vs Fiscal Policy

Difference Between Monetary Stimulus and Fiscal Stimulus

Monetary Stimulus

Fiscal Stimulus

Monetary stimulus is regulated primarily by central banks that focus on low inflation rates to stabilize the economy’s growth by increasing the amount of money available.

Fiscal stimulus meaning represents mainly a government-regulated measure that deals with government spending and taxation changes to revive the economy.

Monetary stimulus reduces interest rates and enhances the money supply by injecting more cash into the economy.

Fiscal stimulus is a measure done by the government through direct spending and enhancing hiring to promote growth and employment.

Central banks undertake monetary stimulus to regulate the money supply in the country through interest rates.

The government uses fiscal stimulus to influence overall supply and demand by altering taxes, increasing spending and boosting overall economic growth.

The monetary stimulus gives people access to extra money during times of recession.

Fiscal stimulus, on the contrary, is the last resort to achieve steady economic growth and price stability.

Monetary Stimulus and Fiscal Stimulus

The major difference between monetary stimulus and fiscal stimulus is that monetary policies are managed by the central banks of a country and are concerned with the interest rates and management of the money supply in an economy. In contrast, fiscal policy concerns how the government manages various aspects of spending and taxation.

What is Monetary Stimulus?

A monetary stimulus involves the central bank either expanding the supply of money or reducing the cost of money or the rate of interest to encourage consumer spending. It measures the interest rates applicable for lending money in the economy.

  • The goal of monetary stimulus is to get individuals to use that money.
  • The government aims to make it simpler for firms and consumers to spend money by lowering loan rates or flooding the market with new capital.

What is 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 various economic activities, especially during the economic slowdown.

  • Fiscal stimulus operates through direct expenditure.
  • This often operates in one of two ways.
  • Most frequently, a government will increase spending and hiring.
  • The government will start more projects, acquire additional materials and tools, and hire more personnel.

Conclusion:

Key Difference between Monetary Stimulus and Fiscal Stimulus

The key Difference between Monetary Stimulus and Fiscal Stimulus is that the Monetary Stimulus cause reduced interest rates and is carried out by the central bank. In contrast, Fiscal Stimulus causes tax reduction and is carried out by the Government.

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