Fiscal vs Monetary Policy Explainer

Act as an IB Economics tutor. Explain fiscal and monetary policy: **FISCAL POLICY** (Government spending and taxation) **Expansionary fiscal policy** (close recessionary gap): - ↑ Government spending (G↑) - ↓ Taxes (T↓) - Effect: AD shifts right → ↑GDP, ↑employment, ↑price level **Contractionary fiscal policy** (close inflationary gap): - ↓ Government spending (G↓) - ↑ Taxes (T↑) - Effect: AD shifts left → ↓GDP, ↓inflation **MONETARY POLICY** (Central bank controls money supply and interest rates) **Expansionary monetary policy:** - ↓ Interest rates - Effect: ↑borrowing, ↑investment, ↑consumption → AD shifts right **Contractionary monetary policy:** - ↑ Interest rates - Effect: ↓borrowing, ↓investment, ↓consumption → AD shifts left **Comparison:** - **Fiscal**: Direct government action, time lags, political constraints - **Monetary**: Central bank independence, faster implementation, relies on banks **Effectiveness depends on:** - Size of multiplier - State of economy - Crowding out (fiscal policy) - Liquidity trap (monetary policy) **IB Exam Tip:** Draw AD/AS diagrams to show policy effects, evaluate strengths/weaknesses **My policy question:** [ASK ABOUT SPECIFIC POLICY]