EconomicsExam code: 0455
Fiscal & Monetary Policy
Government and the Macroeconomy
| Fiscal policy | Monetary policy | |
|---|---|---|
| Decision-maker | Government / treasury | Central bank (independent) |
| Main tools | Tax rates, public spending | Interest rates, money supply, foreign exchange rate |
| Targeted directly at | Specific groups (e.g. low-income tax cuts, NHS spending) | Whole economy (all borrowers and savers) |
| Speed | Slow to legislate; faster to take effect once passed | Fast to decide; slow to feed through |
| Political pressure | High (visible tax-and-spend decisions) | Lower (central bank insulated) |
| Main constraint | A deficit must be funded by borrowing, which adds to debt interest | Little room to cut when rates are already very low |
Most countries use both together: monetary policy as the first response to inflation; fiscal policy as the first response to a recession (especially a deep one).