Distinguish fiscal policy and monetary policy and their typical business impacts.

• A. Fiscal policy uses government spending and taxation; monetary policy uses central bank tools (interest rates, money supply). Fiscal changes affect demand; monetary changes affect borrowing costs and investment.
• B. Fiscal policy uses central bank tools (interest rates, money supply).
• C. Fiscal policy affects demand; monetary policy affects employment.
• D. Fiscal policy affects only domestic markets; monetary policy only international markets.

Answer: (A)

The main idea here is how policy tools move the economy and, in turn, influence what businesses experience. Fiscal policy relies on government spending and taxation. When the government spends more or cuts taxes, it directly boosts aggregate demand because people and firms have more income to spend or invest. For businesses, expansionary fiscal policy can lift sales, prompt hiring, and support growth, while contractionary steps can dampen demand and slow expansion.

Monetary policy, run by the central bank, uses tools like interest rates, reserve requirements, and open market operations to influence the money supply and borrowing costs. Lower interest rates make loans cheaper, encouraging businesses to invest in equipment, projects, and hiring; higher rates do the opposite. Monetary policy also affects inflation expectations and, over time, exchange rates, which can impact pricing, costs, and competitiveness.

So, the typical business impact is: fiscal policy shapes overall demand through government action and tax changes, while monetary policy shapes the cost and availability of financing, influencing investment and spending decisions.