What is the difference between fiscal and monetary policies?
Renowned economist Keynes believed that taxes and expenditure decisions, that is fiscal policy, should be used to stabilize the economy. According to him, government should cut taxes and increase spending to bring the economy out of a slump, this kind of a policy action is known is expansionary fiscal policy. On the other hand, government should increase taxes and cut expenditure to bring the economy out of inflationary pressure, that is, it should follow a contractionary fiscal policy. The classical economists however believed that the government can affect the level of output, overall price level and interest rates by determining the level of money supply in the economy. When the central bank uses tools like CRR and repo rate to control the level of money supply to stabilize the economy then it is known as the monetary policy.
