Step ➊ : Define fiscal policy and monetary policy in the introduction.

Both fiscal policy and monetary policy can be used to increase aggregate demand. Fiscal policy is the use of taxation and government spending to manage aggregate demand in order to achieve the government’s macroeconomic aims whereas monetary policy refers to any policy measures or instruments to influence the price or quantity of money. The three instruments of monetary policy are the interest rate, the money supply and the exchange rate.


Step ➋ : Explain the difference between fiscal policy and monetary policy.


➤ 2.1 Fiscal policy involves changes in government spending and tax rates whereas monetary policy involves changes in interest rates and money supply.