Difference between monetary and fiscal policy Essay.
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Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes. Unlike monetary policy that changes the money supply and influences the spending decisions, government alters its own purchases of goods and services in the fiscal policy; thus, fiscal policy shifts the aggregate-demand curve directly.
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It helps us understand how monetary policy affects economic activity and interacts with fiscal policy to produce a certain level of aggregate output. It also helps us understand how the levels of interest rates are affected by the change in investments, as well as by changes in monetary policy and fiscal policy.
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