Final answer:
Monetary policy is the control of money supply and interest rates managed by a central bank, and includes activities such as adjusting the federal funds rate. Fiscal policy comprises government decisions on spending and taxes, controlled by Congress and the President. The coordination of these policies is crucial for economic stability, although fiscal policy changes are generally slower to implement.
Step-by-step explanation:
Monetary policy and fiscal policy are two of the most important tools for regulating a country’s economy. Monetary policy is concerned with the control of the money supply and interest rates, largely managed by a central bank such as the Federal Reserve in the United States. It includes actions such as adjusting the federal funds rate, which influences short-term interest rates, and conducting open market operations that modify the amount of money in the banking system.
On the other hand, fiscal policy involves decisions made by a government regarding its spending and taxation levels. For example, when a government increases public spending or cuts taxes, this expansionary fiscal policy is intended to stimulate economic growth. Conversely, reducing government spending or increasing taxes constitutes a contractionary fiscal policy, aimed at cooling down an overheated economy.
While the Federal Reserve is responsible for monetary policy, fiscal policy is determined by Congress and the President. The coordination between these two types of policies is essential for the smooth functioning of the economy. However, changes to fiscal policy often take longer to enact due to the lengthy legislative process involved compared to relatively quicker adjustments to monetary policy by the central bank.