Μonetary and fiscal policy

Μonetary and fiscal policy

Governments have two ways of affecting the economy:  monetary policy and fiscal policy.

·         Monetary policy is the government’s policy with regards to the supply of money and its price. It is usually the responsibility of a country’s central bank.

·         The main duty of a central bank is to control inflation. It does this by raising and lower interest rates, which affects the rate of economic growth and thereby affects inflation.

·         The other way governments can affect the economy is by changing the amount that they tax, borrow and spend. This is called fiscal policy

·         Usually, a tight monetary policy (= high interest rates) causes a currency to appreciate, while a loose monetary policy (= low interest rates) causes a currency to depreciate. The interplay with fiscal policy however can complicate matters.