How do fiscal and monetary policies work?

The fiscal and monetary policies are two tools used by the government and central bank, respectively, to influence the economy. Fiscal policy refers to the government's decisions regarding taxes and spending. Monetary policy, on the other hand, is administered by the central bank and involves manipulating interest rates and the money supply.

The goal of fiscal policy is to regulate the economy by altering the rate and direction of spending, influencing tax levels, and changing the level and composition of government programs. Increasing government spending can stimulate the economy by boosting demand while decreasing taxes will put more money into the hands of consumers and firms, incentivizing them to spend more.

On the other hand, monetary policy seeks to stabilize the economy by setting interest rates and controlling the money supply. The central bank can increase or decrease the quantity of money in circulation by buying or selling government securities, thus influencing the country's interest rates. When the central bank raises the interest rates, it makes loans more expensive, which reduces demand and slows down the economy. On the other hand, lowering the interest rates will increase the money supply, thereby stimulating economic growth.

Overall, both fiscal and monetary policies have a significant impact on the economy, and policymakers need to be cautious in using them to ensure long-term stability.