Fiscal & Monetary Policy

What is a Fiscal Policy?

  • The use of government spending, taxation and borrowing to achieve relevant economic objectives

What is a Monetary Policy?

  • The use of interest rates and changes to the money supply to achieve relevant economic objectives

What are the main taxes for Fiscal Policy?

  • Income Tax

  • Corporation Tax

  • VAT

What are the main taxes spent on?

  • Health

  • Education

  • Social Security

What happens if the government spends more than taxes?

  • The Government needs to borrow to cover the difference.

  • This gap is known as the budget deficit or 'public sector net borrowing'.

Who manages monetary policy?

  • Since 1997 monetary policy has been controlled by the Bank of England

  • The main changes are in interest rates and the money supply

  • The main objective of monetary policy is to keep inflation low and stable

  • However, the Bank also tries to support the stability of economic growth

Macroeconomics for Fiscal Policy:

  • Fiscal Policy: Policy decided by the government of a country regarding the levels and methods of taxation and the overall amount of government expenditure: Remember: Government spending and investment represent a large % of economic activity

Macroeconomics for Monetary Policy:

  • Monetary Policy: The control of the money supply in an economy and the rate of interest charged for borrowing money. In Highly Developed economies the rate of interest is decided by a central bank which is independent of the government of the day. EG Bank of England, US Federal Reserve Bank, EU Central Bank

Overall Macroeconomics:

  • The overall aim and objectives of fiscal and monetary policy will vary depending on the priorities of the government in power, particularly with respect to the treatment of businesses.