ECON102: Principles of Macroeconomics (2024.A.01)

Watch this video which compares fiscal and monetary policy. Both policies have similar goals in trying to eliminate recessionary and inflationary gaps in the economy. Contractionary fiscal policy means the government spends less and taxes people and businesses more, so they also spend less. Contractionary spending creates a budget surplus and reduces inflationary pressures. Expansionary fiscal policy means the government spends more and taxes less, so people and businesses spend more to expand the economy and fend off a recessionary gap.

The Federal Reserve promotes expansionary monetary policy by decreasing interest rates to increase spending to eliminate a recession. The Federal Reserve promotes contractionary monetary policy by increasing interest rates to reduce spending and eliminate inflationary pressures. These two types of economic policy use different tools, implementation, and entities making policy decisions.