C. QUESTION 3 Explain the difference between the Monetary Policy and Fiscal Policy.

Monetary policy and fiscal policy are two key tools used to influence a country’s economy, but they operate in different ways and are managed by different branches of government. 1. Monetary Policy:  • Who manages it: Conducted by the central bank (for example, the Federal Reserve in the United States or the European Central Bank in the Eurozone).  • Main tools: Controls the money supply and influences interest rates. This includes actions like adjusting benchmark interest rates, buying or selling government bonds (open market operations), and modifying reserve requirements for banks.  • Primary goals: Aims to control inflation, manage employment levels, and maintain overall economic stability. By changing interest rates, the central bank influences borrowing costs, consumer spending, and investment.  • How it works: When the central bank lowers interest rates, it becomes cheaper for businesses and consumers to borrow money, which can stimulate economic activity. Conversely, raising interest rates can help cool down an overheating economy and combat inflation. 2. Fiscal Policy:  • Who manages it: Crafted and implemented by the government (specifically, the legislative and executive branches).  • Main tools: Involves government spending and taxation. This includes decisions about how much money to spend on public services (like infrastructure, education, and defense) and how much to collect in taxes.  • Primary goals: Aims to influence overall economic demand, redistribute income, and provide public goods. Fiscal policy can stimulate the economy during downturns or cool it down if it's growing too fast.  • How it works: Increasing government spending or decreasing taxes can boost economic growth by increasing demand, while cutting spending or increasing taxes can slow down economic activity to prevent inflation from rising too quickly. In summary, while monetary policy deals with controlling the supply of money and interest rates (managed by the central bank), fiscal policy revolves around government spending and taxation (decided by elected officials). Both are used to achieve macroeconomic stability, but they target different aspects of the economy and operate through different mechanisms.