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Effects of Fiscal & Monetary Policy on Personal Finance

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  • 0:00 Fiscal and Monetary Policies
  • 0:43 Fiscal Policy
  • 2:02 Monetary Policy
  • 2:38 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define fiscal and monetary policy. We'll discuss the difference between loose and tight monetary policies and show you how each one can affect your personal finances.

Fiscal and Monetary Policies

Patrick, a college freshman, is enrolled in a class in basic economics. When his professor hands out a packet on fiscal and monetary policy, Patrick expects a dry lecture that has nothing to do with his everyday life. His professor begins by defining fiscal policy, or government adjustments in spending and taxes to affect the economy. By comparison, monetary policies are changes made to the money supply to promote economic health. As the class unfolds, Patrick learns that both fiscal and monetary policies can impact both him and his family. Let's take a look at these two types of policies and how they can affect your personal finances.

Fiscal Policy

There are two main factors of fiscal policy that affect personal finance: government spending and taxes. Government spending can take the form of social security payments, welfare and veteran's benefits. These benefits allow recipients to purchase goods and services, which stimulate the economy. The government also spends money to build and improve roadways or buy weapons, which can increase industry-related employment in these industries, and in turn, the purchasing of more goods and services.

Taxes are also a factor in fiscal policy. When the government lowers the tax rate, individuals and families have more money in their paychecks to spend. On the other hand, when the government increases the tax rate, the result is a reduction in household income that slows down the economy. Patrick finds this alarming and raises his hand to ask a question: 'Why would the government want to slow down the economy?'

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