Fiscal and Monetary Policy

2 Pages Posted: 21 Oct 2008

See all articles by Melissa M. Appleyard

Melissa M. Appleyard

Portland State University - Management

Petra Christmann

Rutgers, The State University of New Jersey - Management & Global Business

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This note provides a summary of the primary fiscal and monetary policies. It also provides a matrix of the expected effects on GDP and interest rates when these policies are enacted simultaneously. The matrix reflects the interactions of the policy mix when both policies are expansionary and contractionary, and when one is expansionary and one is contractionary.




When the fiscal and monetary policymakers use their respective tools to push the economy in the same direction, policies are said to be “coordinated.” Depending on the degree of independence of the monetary authority, in some instances, the monetary authority may not accommodate fiscal policy changes. For example, when President Reagan instituted a tax cut in the United States (expansionary fiscal policy), the Federal Reserve tightened monetary policy because it feared inflation. Similarly, in Germany during the Reunification after the fall of the Berlin Wall in November 1989, the central bank and the German government enacted countervailing policies.

Table 1 summarizes the tools at the disposal of fiscal and monetary policymakers.

Table 1

Policy Tool

. . .

Keywords: macroeconomics, monetary policy, policy formulation, political economy

Suggested Citation

Appleyard, Melissa M. and Christmann, Petra, Fiscal and Monetary Policy. Darden Case No. UVA-BP-0453, Available at SSRN:

Melissa M. Appleyard (Contact Author)

Portland State University - Management ( email )

United States

Petra Christmann

Rutgers, The State University of New Jersey - Management & Global Business ( email )

Newark, NJ
United States
(973)353-1065 (Phone)
(973)353-1664 (Fax)

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