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What is the difference between fiscal and monetary policy?

Fiscal policy concerns changes in levels of taxation and government spending, whilst monetary policy concerns changes in the interest rate. These are both tools used by the government/ central bank to influence key macroeconomic indicators.The purpose of fiscal policy may be to influence aggregate demand, since taxation affects aggregate demand through consumption and investment, and government spending affects aggregate demand through the G component. When considering fiscal policy, one may also consider the implications on the fiscal deficit and the national debt.Monetary policy is controlled by the Monetary Policy Committee of the Bank of England in the UK, and its purpose is to control the inflation rate, which is targeted at 1% + or – 1% of 2% CPI inflation.



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