Fiscal Policy vs Monetary Policy
Fiscal Policy and Monetary Policy are related concepts in AP Economics that students often mix up. In short: fiscal policy is fiscal policy is the government's use of spending and taxation to influence aggregate demand and the economy. Meanwhile, monetary policy is monetary policy is the central bank's use of the money supply and interest rates to influence the economy. Here is how they compare side by side.
Fiscal policy is the government's use of spending and taxation to influence aggregate demand and the economy.
Expansionary fiscal policy (more spending or lower taxes) shifts aggregate demand right to fight a recession; contractionary fiscal policy does the reverse to cool inflation. It is set by the legislature and executive, not the central bank. Its impact is amplified by the spending and tax multipliers but weakened by crowding out and time lags.
Monetary policy is the central bank's use of the money supply and interest rates to influence the economy.
The central bank (the Federal Reserve in the U.S.) uses open market operations, the discount rate, and reserve requirements to change the money supply. Expansionary (easy) policy lowers interest rates to boost borrowing and aggregate demand; contractionary (tight) policy raises rates to fight inflation. Unlike fiscal policy, it is controlled by the central bank.