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Transcript (to have on screen while you listen)
Monetary Policy: A Quick and Dirty Explainer 2:49min
Hi, I’m Derek Thompson. This is Economics in Plain English, where I answer your questions about business and money.
You asked – what is the difference between fiscal policy and monetary policy?
Now, I know, I know – this sounds like a super boring question but it’s an important question and there is a cool way to think about it.
So, when Washington wants to save the economy, it has two big toolboxes at its disposal; fiscal policy and monetary policy. Let’s start with fiscal policy – this is basically the government’s ability to tax and spend and when the economy stinks, Washington tends to lower taxes and spend more money to fill the holes in state budgets.
Tool number two is monetary policy. Now, if you ask an economist to explain monetary policy he’ll say something like “Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply” but there is an easier way to think about this.
Y’know, capitalism is sort of a game of chance so let’s imagine the US economy is a casino, and Washington is the floor manager. (and) Since the economy has been kind of crummy recently, let’s pretend it’s an awful casino where none of the gamblers want to sit down and actually place any bets. Families don’t want to buy big new houses, businesses don’t want to open up new offices, banks don’t want to lend money to the businesses and the families. People don’t want to gamble their money.
There’s two ways that Washington, the floor manager, can intervene in a situation like this. First, he could stand at the door and hand out twenty dollar bills and say “Hi, welcome to Uncle Sam’s casino, here is some money, go have fun”
That would be kind of (kinda) like fiscal policy.
Another way to get people to place more bets would be to announce over their intercom that you were doubling the number of chips in every pot, on every table. It wouldn’t necessarily make anybody automatically richer – it would make people more likely to take risks. This is kind of like monetary policy.
Fiscal policy and monetary policy work best when they’re working together. Giving gamblers better odds doesn’t matter if they don’t have any money in the first place.
Since the Great Recession, Washington has been a pretty active floor manager. It has handed out money at the door in the form of tax cuts and direct stimulus to the states, and – it’s bought gunky assets off the banks’ balance sheets, and cut interest rates and this has raised the chip supply.
It’s all been done in the hopes that families and businesses would take more risk, if the hand they had was worth playing.