Expansionary Fiscal Policy vs Expansionary Monetary Policy

Expansionary fiscal policy is an increase in government spending or a cut in taxes used to boost aggregate demand in a recession.

It shifts aggregate demand right, raising real GDP and lowering unemployment, often at the cost of higher prices and a larger budget deficit. It is most appropriate during a recessionary gap. Its impact can be weakened by crowding out and time lags.

Expansionary monetary policy increases the money supply to lower interest rates and stimulate aggregate demand.

The central bank buys bonds, lowers the discount rate, or cuts the reserve requirement. Lower interest rates boost investment and interest-sensitive consumption, shifting aggregate demand right. It is used to fight recession and unemployment.