AP MacroeconomicsFiscal Policy
Fiscal Policy vs. Monetary Policy
Fiscal and monetary policy both steer aggregate demand, but fiscal policy uses spending and taxes while monetary policy uses the money supply and interest rates.
Fiscal policy is controlled by the legislature and executive; monetary policy is controlled by the central bank. Fiscal policy acts directly through government spending and taxes but faces political lags and crowding out; monetary policy acts faster but indirectly through interest rates and investment. Both can be expansionary to fight recession or contractionary to fight inflation.
Formula / Example
Fiscal: change G or T → shift AD. Monetary: change money supply → change interest rate → shift AD.
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