Monetary and fiscal policy instruments

timer Asked: Dec 12th, 2015
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Question Description

a.    What is the difference between contractionary and expansionary monetary policy? What is the difference between contractionary and expansionary fiscal policy? How does each policy affect the AD in the economy?

b.    What are the benefits and major problems of the fiscal policy and monetary policy?

Tutor Answer

School: Carnegie Mellon University

Thank you for the opportunity to help you with your question!

An expansionary monetary policy focuses on expanding the money supply in the economy while contractionary monetary policy focuses on money supply in the economy. The central bank uses its monetary tools to either decrease or increase money supply in the market.

Expansionary fiscal policies are those that expand the economy such as reduction of taxes and increasing government spending. Contractionary fiscal policies on the other hand are those which slow down the economy for instance, reducing government spending and increasing taxes.

aggregate demand is the measure of the demand of an economy's gross domestic product. Fiscal policy influences government expenditure and has an impact on the consumption and investment factors. monetary policy influences money supply which in  turn influences interest rates and inflation.

monetary pro

an increase in inflation encourages higher investment in the future and allows workers to expect higher wages.


oversupplying the economy with money is a risk and high levels of inflation in the economy makes the currency lose its value in that market.

fiscal policy pro

Unlike monetary policy tools which are general in nature, a government can direct spending towards specific projects, sectors, or regions to stimulate the economy where it is perceived to be needed to most.


The effect of fiscal stimulus is muted when the money put in to the economy through tax savings or government spending is spent on imports, sending that money abroad instead of keeping it in the local economy.

Please let me know if you need any clarification. I'm always happy to answer your questions.

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Tutor went the extra mile to help me with this essay. Citations were a bit shaky but I appreciated how well he handled APA styles and how ok he was to change them even though I didnt specify. Got a B+ which is believable and acceptable.

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