Monetary Policy & Fiscal Policy

Monetary Policy

As we learned in the prior section the Bank of Canada has the ability to increase or decrease the number of dollars in the the economy. As we also have learnt this can impact inflation and deflation. When the Bank of Canada uses or is instructed to use this system to achieve a goal such as a rate of inflation, we call this Monetary Policy.

Fiscal Policy

Meanwhile Fiscal Policy is when the government uses spending programs and/or tax incentives to stimulate the economy. Perhaps the two most common examples of this are:

  • Infrastructure Spending - where the government identifies infrastructure spending like roads and bridges and builds them within a desired time frame (often escalated to fit the policy needs). This creates employment and spending (buying steel, concrete etc) within the economy.
  • Cutting taxes or offering specific tax rebates. In order to get more money back into the hands of the consumers the government can lower the tax rates or offer tax rebates for parts of the economy.


There is a case to be made both for and against how effective government Monetary & Fiscal Policy can be and if there are unintended side effects/consequences of such action. For this exercise, research what "Stabilization Policy" is and the pros and cons. We also have a resource in the resource section. There will be an exam question related.