Explain the difference between monetary policy and fiscal policy.

• A. Monetary policy uses money supply and interest rates (central bank); fiscal policy uses government spending and taxes.
• B. Monetary uses taxes; fiscal uses interest rates.
• C. Monetary policy uses defense spending; fiscal uses education.
• D. Monetary policy sets wage rules; fiscal policy sets exchange rates.

Answer: (A)

The main idea here is how monetary policy and fiscal policy differ in what they use and who runs them. Monetary policy, usually carried out by the central bank, steers the economy through the money supply and interest rates. By changing how much money is in circulation or by adjusting policy rates, the central bank influences borrowing costs, spending, and inflation.

Fiscal policy, handled by the government, uses government spending and taxes to affect the economy. Adjusting spending levels or changing tax rates changes overall demand, which can stimulate growth or slow it down.

This is why the correct statement fits best: monetary policy focuses on money supply and interest rates, while fiscal policy focuses on government spending and taxes. The others mix up which tools belong to which policy or give examples that aren’t the defining instruments (taxes are fiscal, not monetary; interest rates are monetary, not fiscal; defense or education are types of spending, not the policy tool itself).