fiscal policy is the use of government revenue collection (mainly taxes)

and expenditure (spending) to influence the economy.[1] According to

Keynesian economics, when the government changes the levels of
taxation and government spending, it influences aggregate demand and
the level of economic activity. Fiscal policy can be used to stabilize the
economy over the course of the business cycle.[2]
The two main instruments of fiscal policy are changes in the level and
composition of taxation and government spending in various sectors.
These changes can affect the following macroeconomic variables,
amongst others, in an economy:
1. Aggregate demand and the level of economic activity;
2. Savings and Investment in the economy
3. The distribution of income
The three main stances of fiscal policy are:
neutral fiscal policy is usually undertaken when an economy is in
equilibrium. Government spending is fully funded by tax revenue and
overall the budget outcome has a neutral effect on the level of economic
activity.
Expansionary fiscal policy involves government spending exceeding
tax revenue, and is usually undertaken during recessions.
Contractionary fiscal policy occurs when government spending is
lower than tax revenue, and is usually undertaken to pay down
government debt.

Monetary policy is the process by which the monetary authority of a

country controls the supply of money, often targeting an inflation rate or
interest rate to ensure price stability and general trust in the currency.
Further goals of a monetary policy are usually to contribute to economic
growth and stability, to low unemployment, and to predictable exchange
rates with other currencies.
Monetary economics provides insight into how to craft optimal
monetary policy.
Monetary policy is referred to as either being expansionary or
contractionary, where an expansionary policy increases the total supply
of money in the economy more rapidly than usual, and contractionary
policy expands the money supply more slowly than usual or even shrinks
it. Expansionary policy is traditionally used to try to combat
unemployment in a recession by lowering interest rates in the hope that
easy credit will entice businesses into expanding. Contractionary policy
is intended to slow inflation in order to avoid the resulting distortions
and deterioration of asset values.
Monetary Policy:

Target Market Variable:

Long Term Objective:

Inflation Targeting

Interest rate on overnight debt

A given rate of change in the CPI

Price Level Targeting

Interest rate on overnight debt

A specific CPI number

Monetary Aggregates

The growth in money supply

A given rate of change in the CPI

Fixed Exchange Rate

The spot price of the currency

The spot price of the currency

Gold Standard

The spot price of gold

Low inflation as measured by the gold price

Mixed Policy

Inflation targeting is an economic policy in which a central bank

estimates or decides for a medium-term target inflation rate and makes
public this "inflation target". Then the central bank attempts to steer
with short-term instruments at its own discretion actual inflation towards
this target through the use of interest rate changes and other monetary
tools.
Price level targeting is a monetary policy that is similar to inflation
targeting except that CPI growth in one year over or under the long term
price level target is offset in subsequent years such that a targeted
price-level is reached over time, e.g. five years, giving more certainty
about future price increases to consumers. Under inflation targeting
what happened in the immediate past years is not taken into account or
adjusted for in the current and future years.
Monetary aggregates
. This approach was refined to include different classes of money and
credit (M0, M1 etc.).

fixed exchange rate, sometimes called a pegged exchange rate, is a

type of exchange rate regime where a currency's value is fixed against
either the value of another single currency, to a basket of other
currencies, or to another measure of value, such as gold. There are
benefits and risks to using a fixed exchange rate. A fixed exchange rate
is usually used in order to stabilize the value of a currency by directly
fixing its value in a predetermined ratio to a different, more stable or
more internationally prevalent currency (or currencies), to which the
value is pegged. In doing so, the exchange rate between the currency
and its peg does not change based on market conditions, the way
floating currencies will do. This makes trade and investments between
the two currency areas easier and more predictable, and is especially
useful for small economies in which external trade forms a large part of
their GDP(Gross Domestic Product).
A fixed exchange-rate system can also be used as a means to control
the behavior of a currency, such as by limiting rates of inflation.
Gold standard is a monetary system in which the standard economic
unit of account is based on a fixed quantity of gold. Three types may be
distinguished: specie, exchange, and bullion.
1. In the gold specie standard the monetary unit is associated with the
value of circulating gold coins or the monetary unit has the value of a
certain circulating gold coin, but other coins may be made of less
valuable metal.
2. The gold bullion standard is a system in which gold coins do not
circulate, but the authorities agree to sell gold bullion on demand at a
fixed price in exchange for the circulating currency.
3. The gold exchange standard usually does not involve the circulation of
gold coins. The main feature of the gold exchange standard is that the
government guarantees a fixed exchange rate to the currency of another
country that uses a gold standard (specie or bullion), regardless of what
type of notes or coins are used as a means of exchange. This creates a
de facto gold standard, where the value of the means of exchange has a
fixed external value in terms of gold that is independent of the inherent
value of the means of exchange itself.
Policy tools
Monetary policy uses three main tactical approaches to maintain
monetary stability:
Money supply. The first tactic manages the money supply. This mainly
involves buying government bonds (expanding the money supply) or
selling them (contracting the money supply). In the Federal Reserve
System, these are known as open market operations, because the
central bank buys and sells government bonds in public markets. Most of
the government bonds bought and sold through open market operations
are short-term government bonds bought and sold from Federal Reserve
System member banks and from large financial institutions .When the
central bank disburses or collects payment for these bonds, it alters the
amount of money in the economy while simultaneously affecting the
price (and thereby the yield) of short-term government bonds. The

change in the amount of money in the economy in turn affects interbank

interest rates.
Money demand. The second tactic manages money demand. Demand
for money, like demand for most things, is sensitive to price. For money,
the price is the interest rates charged to borrowers. Setting bankingsystem lending or interest rates (such as the US overnight bank lending
rate, the federal funds discount Rate, and the London Interbank Offer
Rate, or Libor) in order to manage money demand is a major tool used
by central banks. Ordinarily, a central bank conducts monetary policy by
raising or lowering its interest rate target for the interbank interest rate.
If the nominal interest rate is at or very near zero, the central bank
cannot lower it further. Such a situation, called a liquidity trap,can occur,
for example, during deflation or when inflation is very low.
Banking risk. The third tactic involves managing risk within the
banking system. Banking systems use fractional reserve banking to
encourage the use of money for investment and expanding economic
activity. Banks must keep banking reserves on hand to handle actual
cash needs, but they can lend an amount equal to several times their
actual reserves. The money lent out by banks increases the money
supply, and too much money (whether lent or printed) will lead to
inflation. Central banks manage systemic risks by maintaining a balance
between expansionary economic activity through bank lending and
control of inflation through reserve requirements.
These three approaches -- open-market activities, setting bankingsystem lending or interest rates, and setting banking-system reserve
requirements to manage systemic risk -- are the "normal" methods used
by central banks to ensure an adequate money supply to sustain and
expand an economy and to manage or limit the effects of recessions and
inflation. These "standard" supply, demand, and risk management tools
keep market interest rates and inflation at specified target values by
balancing the banking system's supply of money against the demands of
the aggregate market.
Unconventional monetary policy at the zero bound
Other forms of monetary policy, particularly used when interest rates are
at or near 0% and there are concerns about deflation or deflation is
occurring, are referred to as unconventional monetary policy. These
include credit easing, quantitative easing, and signaling. In credit easing,
a central bank purchases private sector assets to improve liquidity and
improve access to credit. Signaling can be used to lower market
expectations for lower interest rates in the future. For example, during
the credit crisis of 2008, the US Federal Reserve indicated rates would
be low for an extended period, and the Bank of Canada made a
conditional commitment to keep rates at the lower bound of 25 basis
points (0.25%) until the end of the second quarter of 2010.