18/04/2026
FISCAL POLICY
🔹 Meaning
Fiscal policy refers to the use of government revenue (taxation) and government expenditure (spending) to influence the economy.
It is controlled by the government (Ministry of Finance).
🔹 Objectives of Fiscal Policy
Economic growth
Price stability (control inflation)
Full employment
Income redistribution
Balance of payments stability
Provision of public goods (roads, schools, hospitals)
🔹 Instruments (Tools) of Fiscal Policy
1. Taxation
Direct taxes (income tax, company tax)
Indirect taxes (VAT, customs duties)
👉 Government can:
Increase taxes → reduce spending (fight inflation)
Decrease taxes → increase spending (boost economy)
2. Government Expenditure
Capital expenditure (infrastructure)
Recurrent expenditure (salaries, administration)
👉 Government can:
Increase spending → stimulate growth
Reduce spending → control inflation
3. Public Borrowing
Borrowing from the public or foreign institutions
4. Budgeting
Annual financial plan showing expected revenue and expenditure
🔹 Types of Fiscal Policy
1. Expansionary Fiscal Policy
Increase spending + reduce taxes
Used during recession/unemployment
2. Contractionary Fiscal Policy
Reduce spending + increase taxes
Used during inflation
🔹 Advantages of Fiscal Policy
Direct impact on development
Helps reduce unemployment
Improves infrastructure
Can reduce inequality
🔹 Disadvantages of Fiscal Policy
Time lag in implementation
Political interference
Budget deficits
Borrowing can increase debt
📗 MONETARY POLICY
🔹 Meaning
Monetary policy is the control of money supply and interest rates in the economy.
It is controlled by the Central Bank (e.g., Central Bank of Nigeria).
🔹 Objectives of Monetary Policy
Price stability (control inflation)
Economic growth
Full employment
Stable exchange rate
Control money supply
🔹 Instruments (Tools) of Monetary Policy
1. Interest Rate
Increase → borrowing decreases
Decrease → borrowing increases
2. Open Market Operations (OMO)
Buying and selling of government securities
👉 Central Bank:
Buys securities → increases money supply
Sells securities → reduces money supply
3. Cash Reserve Ratio (CRR)
Percentage of bank deposits kept with the Central Bank
4. Liquidity Ratio
Amount banks must keep as liquid assets
5. Bank Rate / Discount Rate
Rate at which Central Bank lends to commercial banks
🔹 Types of Monetary Policy
1. Expansionary Monetary Policy
Increase money supply
Lower interest rates
Used during recession
2. Contractionary Monetary Policy
Reduce money supply
Raise interest rates
Used during inflation
🔹 Advantages of Monetary Policy
Quick to implement
Helps control inflation
Stabilizes currency
Encourages investment
🔹 Disadvantages of Monetary Policy
Less effective in underdeveloped economies
May not reach all sectors
Depends on banking system strength
📊 DIFFERENCE BETWEEN FISCAL & MONETARY POLICY
Aspect
Fiscal Policy
Monetary Policy
Controlled by
Government
Central Bank
Focus
Taxes & spending
Money supply & interest rates
Tools
Budget, taxes, spending
Interest rate, OMO, CRR
Speed
Slower
Faster
Main Goal
Economic development
Price stability
🧠 SIMPLE SUMMARY
Fiscal Policy = Government spends & taxes
Monetary Policy = Central Bank controls money
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