Distinguishing Between Fiscal Policy and Monetary Policy

Fiscal policy is the use of government spending, taxation and the government's budgetary position. As where the monetary policy involves the use of interest rates to achieve the government's policy objectives. Both fiscal and monetary policies are used in combination with other policies to achieve the macroeconomic objectives of:

• low unemployment
• sustainable and positive economic growth
• low levels of CPI inflation
• a 'satisfactory' balance on the current account of the balance of payments
• exchange rate stability.

Fiscal policy is based on the works of John Maynard Keynes, which states that government can influence productivity levels by increasing or decreasing tax levels and government spending. Leading to changes in inflation, employment and the value of money.


Monetary policy is mainly used to control the flow of money. If the money supply flows are too fast then inflation will rise and if the money supply flows are too slow then inflation will fall. The use of monetary policy aims to keep inflation at the target rate of 2% CPI.