What is the main difference between fiscal policy and monetary policy?

The main distinction between fiscal policy and monetary policy lies in their mechanisms and areas of focus. Fiscal policy involves government actions related to taxation and spending. This policy is typically determined by the legislative and executive branches of government and aims to influence economic activity by altering the levels of government expenditure and tax rates. For example, during a recession, the government may increase spending or decrease taxes to stimulate economic growth.

In contrast, monetary policy is the domain of the central bank and is mainly concerned with controlling the money supply and interest rates to achieve macroeconomic goals such as controlling inflation, managing employment levels, and maintaining financial stability.

Understanding this distinction clarifies why the correct answer accurately reflects the function of fiscal policy in economic management, primarily involving decisions regarding how much the government collects in taxes and how much it spends on public services and programs.