Which statement best describes the difference between fiscal policy and monetary policy?

• A. Fiscal policy uses central bank tools; monetary policy uses government spending and taxation
• B. Fiscal policy is the federal government's role; monetary policy is the Federal Reserve's role
• C. Fiscal policy focuses on long-term planning; monetary policy focuses on short-term stabilization
• D. Fiscal policy uses government spending and taxation; monetary policy uses the central bank's actions like interest rates and money supply

Answer: (D)

The main idea is about who controls policy and what tools they use to influence the economy. Fiscal policy is driven by the government and uses spending and taxation to affect demand in the economy. By changing how much the government spends or collects in taxes, it can stimulate activity during a downturn or cool things down if inflation rises. Monetary policy, on the other hand, is run by the central bank and relies on tools like adjusting interest rates and controlling the money supply to influence borrowing, spending, and inflation. This distinction—who acts (government vs. central bank) and what tools they use (spending/taxes vs. interest rates/money supply)—is why the statement describing fiscal policy as using government spending and taxation and monetary policy as using the central bank’s actions like interest rates and money supply is the best fit. The other options mix up roles or tools and don’t clearly capture the fundamental difference in instruments and actors.