Hi everyone. This is Mallika, author of How The Best Invest, and today I want you to talk to you about the difference between fiscal policy and monetary policy. As the government intervenes in the economy, much, much more with the coronavirus raging, fiscal policy and monetary policy are constantly in the news.
I for one get confused between the two and when I'm reading very quickly - I have to stop and really think about which one is which. So I've developed a mental model in my head, which helps me just digest information faster.
Let's take fiscal policy first. “Fiscal” comes from the Latin word Fiscus, which referred to the personal wealth chest of the Roman emperors. Fiscus means from purse or basket. Fiscal policy tries to influence economic activity by raising or lowering taxes and setting a budget. When you read “fiscal” imagine a Roman emperor, filling the basket, his personal chest with taxes from the population.
Let's take the second term monetary policy. “Monetary” derives from the word Moneta, which means mint, and comes from Latin referring to the temple of the Juno of Moneta, where the Romans first had their first mint and created their coinage. The coins from the temple of Moneta became associated with money and eventually monetary policy. If you can imagine a temple like structure, which is what the Bank of England looks like, or the Fed Reserve looks like. They are Roman temple-like buildings with columns and a triangle, a pediment on top. These institutions control the circulation of money in the economy through printing money, interest rates, and other policies.
In order to remember monetary policy, if you can remember the Temple of Moneta where money was created. To remember fiscal policy, remember the purse and the emperor putting money into his purse, which is taxes. I hope you find that a useful mental model.
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