Certified Financial Planner (CFP) Exam 2026 – 400 Free Practice Questions to Pass the Exam

The Federal Funds Rate is primarily a tool of monetary policy, which is managed by the Federal Reserve. Monetary policy focuses on managing the economy through the money supply and interest rates, affecting inflation and overall economic activity. In contrast, fiscal policy involves government spending and tax policies that aim to influence economic activity.

Increasing government purchases of goods and services, reducing taxes, and utilizing higher taxes to reduce consumption are all elements of fiscal policy. These actions can directly affect aggregate demand in the economy. For example, increasing government purchases injects money into the economy, while changes in tax rates can influence consumer spending and investment patterns.

Since adjusting the Federal Funds Rate does not involve government fiscal measures but rather monetary actions taken by the central bank to manipulate the money supply or control inflation, it is categorized distinctly from the initiatives that form the basis of fiscal policy.