Has this ever happened to you? You’ve been in a conversation and someone starts talking about monetary policy and how it affects this, or fiscal policy and how to fix that, and you didn’t feel comfortable asking what the difference is. I’ve been there, so I want to help you break through that uneasiness and explain the difference between the two.

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But let’s get back to this whole thing about monetary and fiscal policy and the differences between the two. Like I said, I’ve been in those conversation or have been watching the news where they’re talking about monetary and fiscal policy. Sometimes we don’t take the time to actually look them up. Maybe that’s why you’re here, wanting to find out the difference. Both of these tools are used to influence a nation’s economy. In my examples, I’m going to use the U.S. because it’s the easiest to understand. I’ll also probably make reference to Europe because I live there and invest in the United States.

In the case of monetary policy, it does two things: first, it manages interest rates, and second, it manages the amount of money that’s actually in circulation. Central banks are able to manage interest rates depending on whether the interest rate is high or lower, which could actually incentivize people to either make more investments or fewer investments to put more money in their savings account or less money in their savings account. If you’re saving more, there’s less in circulation, but if you’re saving less, then there’s more in circulation.

One of the things that central banks do, whether it’s the Federal Reserve or the European Central Bank, is reserve ratios. This is the amount or percentage of money that a specific bank needs to have on reserve. If that percentage is low, then it means the banks don’t have as much real currency in their vaults, versus when the ratios were high.

On the other hand, fiscal policy is managed at the government level, and it takes care of two things as well. Number one, it is based on the amount of tax being collected, which means the government can increase or decrease the amount of taxes they ask of their citizens, which effects the amount of spending. Number two, fiscal policy controls the amount of spending a government does. For example, we hear a lot about stimulus packages, which is when the government sees there’s not enough business activity and starts to look at how they can spend more to boost the economy. A lot of times they talk about building highways or bridges because if the government is going to improve those types of infrastructure, they’re going to hire companies and create more jobs to do it. Those companies then hire employees, which are stimulated through fiscal policy.

Sometimes you also have governments that want to spend but don’t have the money. That’s what they call deficit spending. When you have governments spending in deficit, that usually means they’re putting out some type of security, typically debt. A lot of times you’ve heard of a treasury bill or bonds that a government will put out. These basically say that if they borrow money from someone, they will give them interest payments over a fixed period of time. This is fiscal policy, and this is what affects us the most. It affects consumers the most because fiscal policy is when our taxes are raised or lowered while we have more money in our pockets or not. This type of spending could also create new jobs, or even potentially cause fewer jobs to be available. I know some of these policies can be a little crazy, but at the end of the day, what are they doing? They’re using tools to influence the nation’s economy.

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Hopefully I’ve made this a little bit easier and clearer for you. I’d love your feedback. I always want it! Let me know if you liked this entry, and once again, give it a like and leave a comment about what you liked or what could be made clearer. Once again, don’t forget to share. I always appreciate it. For anyone interested who maybe lives in one country and wants to invest in another, or lives in one state and wants to invest in a different one, I’ve done that for the last five and a half years. I’ve written an eBook to give you the step-by-step path I’ve taken. That’s absolutely free. The only thing you need to do is leave your email at keeponcashflow.com/roadmap. And for those of you who are really serious and want to take your game to the next level, I even have a course available to you. If not today, then come back when you are serious about it, and we’ll get started.

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Hopefully this whole explanation of monetary and fiscal policy has helped clarify things for you and explains how it impacts you. That’s it! This is Billy Keels with KeePon Cashflow. That’s my two cents for today. As always, hasta la próxima!

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