What is the meaning of monetary policies?
Confusing monetary policy with fiscal policy can stymie many policy wonks. However, understanding this distinction is important for understanding how the U.S. economy is shaped.DefinitionsMonetary policy refers to actions taken by the Federal Reserve Bank. Generally, these actions involve changing interest rates and money supply.Fiscal PolicyOn the other hand, fiscal policy refers to budgeting. The fiscal policy of the federal government is about taxing and spending. The key fiscal policy document is the budget.SignificanceIf people are spending too much and the economy is expanding too rapidly, the Federal Reserve decreases the money supply and raises interest rates to discourage spending. In a recession (a period of economic contraction), the Fed lowers interest rates and increases money supply to encourage spending.Fun Fact”Tight money” means that the Fed is increasing interest rates.
