Fiscal and Monetary policy form the "macro" (if you arent familiar with this term get familiar with it) arm of a governments policies.
They are demand management policies, and they stimulate consumption, investment etc etc in an economy. This is as opposed to "micro" policies which are supply management policies.
Both Fiscal and Monetary policy have many different interpretations, so be carefull what you read.
The most simplest of definitions will involve something like:
Fiscal - The governments use of a budget surplus or deficit to stimulate economic activity
Monetary - The adjustment of interest rates to stimulate economic activity.
The reality of the situation howevor, is that Fiscal and Monetary policies arent really about this anymore.
So this is what I would suggest to you:
For the nice neat little HSC economics question, use the textbook definition, and provide the traditional approach as above. For that extra bit of value added information which distunguishes a band 6 from a lower band, the following facts might be usefull (although if they arent immediately understood dont stress too much as they are not HSC material)
Fiscal -
Has little use as a macro policy anymore. Very few governments around the world use Fiscal policy to stimulate demand. Most governments rely on fiscal policy to achieve other objectives such as spending on infrastructure (as a form of microeconomic reform), and other political goals. The traditional keynesian view of fiscal policy is that it should be used as a policy designed for stimulation in times of weak economic activity, howevor since the 1970's the economists of the world have shifted to a neo-classical perspective (that is before keynes) whereby it should not be used for these purposes. Nowadays, the major issues surrounding Fiscal policy, particularly from an australian perspective, is taxation (i.e. top tax rate, indexation, company tax, brackets, flat taxes etc) and a concept of eliminating our government debt (which we have done as of this year).
The howard government has a fiscal objective of balancing the budget over the course of the cycle, so as you can see there is no macro objective specifically outlined. Any shift in the budget is most likely a result of specific spending objectives (i.e. the government is spending money for a reason, not just to stimulate activity) or due to automatic stabalisers such as welfare and progressive income tax. The Howard government has run a substantial amount of budget surplus's over the year, most likely as a result of wanting to reduce government debt due to low national savings, and an ageing population.
The reason why fiscal policy is no longer used in the "textbook" manner, is because of a few reasons. Firstly fiscal policy is a really really slow policy. Information lags in understanding the economy's performance and direction, as well as implementation lags makes it incredibly slow. An intuitive estimation of the policy would be around 2 years. That means that if the economy is doing poorly, and the government decides to implement expansionary fiscal policy, it would take two years for the policy to properly kick in (due to information and implementation lags). Not only does this mean that policy makers need to be good guess'ers, but it can also mean that the policy can do more harm that good (i.e. it can make a problem even worse).
The other reason is simply down to its effectiveness. It is no where near as effective in achieving economic stimulation that its big cousin monetary policy in achieving any kind of macroeconomic outcome.
Monetary -
Monetary policy has been one of the most debated economic policies of the last 40years. To understand this debate, you need to look at some history. In the 1930's John Maynard Keynes wrote his piece on "the general theory of money, interest and unemployment". This book basically changed the way economic policy makers operated monetary and fiscal policy. Essentially he said macro policies should be used to smooth out the economic cycle as the economy does not have a tendency to equilibrium.
Moving on to the 1970's, a few things started happening to suggest that some of keynes' ideas were a bit flawed to say the least. Essentially this guy named Milton Friedman who is probably the second most famous economist of the modern era, came out with some revolutionary concepts in monetary theory. Not so revolutionary in hindsight, he essentially pulled up a few identities (such as the velocity of money), and showed that inflation was "always a monetary phenomenon".
The amount of explanation required to go further would take too much time, but essentially what followed was this:
-Keynesian economics is hardly used anymore (apart from bubble management)
-Monetary policy is used to control inflation, not demand
-A new wave of liberalism emerged, most notably from ronald reagan (with his brand of "reaganomics") and margerat thatcher (with her brand of "thatcherism").
The second most notable piece of information relating to monetary policy is how it was used. Prior to 1983 in australia, the mechanism to manage the economy wasn't interest rates, but rather the exchange rate.
Monetary policy is a lot faster to implement than fiscal policy (its instant - well overnight) but it still suffers the same information lags as fiscal policy, so even though it's faster, people like friedman suggested that it should be used passively, or for a specific monetary or inflation target.
In australia weve adopted an inflation target of 2-3% and the RBA is totally independant of the government (a process nailed into place by the howard government)
Milton friedman is the hero of many neo classical and monetarist economists.
