Answer to Question #172863 in Microeconomics for Rauha

Question

how to determine which fiscal or monetary policy is needed.

Answer 1

Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks. Central banks typically use monetary policy to either stimulate an economy or to check its growth. Conversely, by restricting spending and incentivizing savings, monetary policy can act as a brake on inflation and other issues associated with an overheated economy.

Fiscal policy is a collective term for the taxing and spending actions of governments. The aim of most government fiscal policies is to target the total level of spending, the total composition of spending, or both in an economy. If a government believes there is not enough business activity in an economy, it can increase the amount of money it spends. If there are not enough tax receipts to pay for the spending increases, governments borrow money by issuing debt securities such as government bonds and, in the process, accumulate debt.

By increasing taxes, governments pull money out of the economy and slow business activity.