Monetary policies and fiscal policies are two well-known tools used to control a country's economic activity. In various economic conditions, it is necessary for fiscal and monetary policies to be chosen and implemented by the government, the central bank, and other decision-making institutions to control inflation rates, create employment, and manage the amount of liquidity in the market. First, we will explain the difference between fiscal and monetary policies and the tools used for each:

In economics, issues such as the balance of supply and demand, stability of bank interest rates, controlling inflation, boosting production and employment, and similar topics are of great importance. Tools necessary to achieve these conditions in the economic system are known as fiscal and monetary policies. These tools are the intersection of policy and economics, where the macro decisions of governments (as policy) affect financial and physical markets (economics). These policies can influence the level of supply and demand, the amount of liquidity available in the market, price increases or decreases, and conditions of recession or inflation.

To achieve these changes, it is first necessary to analyze and identify the economic conditions and then select and implement the appropriate policies. Fiscal and monetary policies each have different tools, which are described separately:

Fiscal Policies

John Maynard Keynes, a British economist, was one of the first theorists to introduce fiscal policies. According to him, increasing and decreasing government income and expenditure levels affect inflation rates, unemployment, and money circulation. Therefore, to control and influence the country's economic conditions, the government needs to change its income and expenses through specific policies.

These decisions are known as fiscal policies. One of the most important goals of fiscal policies is to increase Gross Domestic Product (GDP), which can be considered an indicator of the population's living standards. GDP shows the value of all goods produced and services provided in a country over a specific period.

Government expenditures include implementing development projects, welfare services, education, healthcare services, subsidies for producers or consumers, etc.

Government revenue sources include taxes, borrowing money from the public or other countries (issuing treasury bonds), selling natural resources and national reserves, selling fixed assets (such as land), and printing money.

Fiscal policies are divided into three categories: neutral, expansionary, and contractionary:

1. Neutral Fiscal Policies:
   • Neutral fiscal policies are usually chosen when the economic cycle is almost balanced. The government uses all its tax revenues for its expenses, having no impact on the economy. This means that when there is no unreasonable inflation or recession, relative stability in prices is observed, no excess supply or demand occurs, and employment levels are balanced. In such a time, tax revenues should not disrupt this balance (i.e., should not be too high to reduce demand or too low to increase demand, resulting in price increases).
2. Expansionary Fiscal Policies:
   • This group of fiscal policies expands economic activities and the economic cycle, known as expansionary fiscal policies. These policies usually result in government expenditures exceeding tax revenues and are typically adopted during recessions. For instance, in a specific period, if the people's income level decreases (taxable income), their purchasing power drops, reducing market demand and potentially causing economic recession. One of the government's policies to increase demand in such a time is to reduce taxes to increase people's income, allowing them to demand more goods and services. This reduction in government revenue requires borrowing from the central bank or selling national reserves to address the budget deficit.
3. Contractionary Fiscal Policies:
   • Contractionary fiscal policies occur when increased taxes provide more revenue than government expenditures, allowing it to pay off its debts. Imagine an economy growing very rapidly, where demand increases day by day, causing inflation and price hikes. In such a situation, the government increases taxes to reduce demand, controlling price increases and using the collected liquidity to pay off debts incurred during the recession.

Monetary Policies

While fiscal policies affect the market for goods and services and supply and demand, they cannot control the circulating liquidity. The need for monetary policies arises in such situations. Monetary policies, using tools such as legal reserve ratio, changes in interest rates, and granting bank facilities, aim to control the volume of liquidity and inflation. These policies are implemented by financial institutions affiliated with governments (central banks), known as monetary policies.

In the USA, the Federal Reserve Bank, and in Europe, the European Central Bank (ECB), are responsible for these decisions.

Simply put, monetary policies are a set of actions taken by the central bank to influence economic variables and market supply and demand by changing the money supply or interest rates.

Monetary policies can have different goals:

• Creating jobs and sustainable economic growth
• Stabilizing general price levels and maintaining stable bank interest rates
• Ensuring stability in financial and currency markets

Monetary policies are also divided into two categories: expansionary and contractionary monetary policies:

1. Expansionary Monetary Policies:
   • Typically, when the economy is in a recession, and circulating liquidity is very low, the central bank reduces bank interest rates and increases loans and facilities to boost liquidity and stimulate production. This process, known as expansionary monetary policies, increases liquidity and money circulation as individuals no longer prefer keeping their investments in banks. On the other hand, the bank can increase loans and facilities, encouraging people to engage in economic activities, thereby revitalizing the economic cycle. This process increases employment and injects more money into the market.
2. Contractionary Monetary Policies:
   • When the volume of money in circulation within the economic cycle is high, leading to increased inflation rates, the central bank raises bank interest rates to encourage people to save their money in banks. This process, known as contractionary monetary policies, also increases the cost of obtaining loans and facilities, reducing people's spending tendency. Although this increases unemployment rates, it is necessary to control inflation.

Which is Better: Expansionary or Contractionary Policies?

In economics, expansionary fiscal and monetary policies are generally those that promote economic growth, create jobs, and increase production. However, these policies do not always have such effects. The long-term effects of expansionary policies can lead to increased liquidity and inflation. As inflation and the general price level of domestic goods rise, the tendency to use domestically produced goods decreases, increasing imports. This often results in decreased domestic production levels and sometimes the bankruptcy of production units.

Therefore, at different times, governments use contractionary fiscal and monetary policies to control liquidity and inflation. Tools such as increasing taxes, raising interest rates, and reducing bank facilities are used to prevent such situations. In various times and conditions, it is not possible to say that only one type of policy should be chosen and implemented. Each of these policies is needed for a specific period and must be implemented at the right time after thoroughly examining all economic conditions. Additionally, the long-term and short-term effects of these policies may differ, offering varying results.