Monetary and fiscal policy

The main objectives of the Government are to:

• maintain full employment

• control inflation

• achieve a balance of payments equilibrium

• stabilise exchange rates

• steady economic growth

• improve the standard of living of people within the country.

Successive governments have used two broad types of strategy to achieve these objectives. These are through the use of:

a) monetary policy

b) fiscal policy.

Monetary policy

Monetary policy involves manipulating the price and supply of money and controlling exchange rates. For example, raising interest rates makes borrowing more expensive.

Monetary policy involves manipulating the price and supply of money and controlling exchange rates.

Consumers will borrow less and demand for goods in the shops will fall.

The exchange rate is the price at which the pound is bought and sold against other currencies. Rising exchange rates make the pound more expensive and make imports cheaper. This reduces prices in domestic markets.

Fiscal policy

The Latin word 'fisc' refers to the public purse (public refers to the government here). Fiscal policy is concerned with how the government collect moneys in taxes and how it decides to spend that money.

All economies need money to support society with hospitals, schools, police, armed forces, social security and state pensions. This is why taxes are needed and why everybody should contribute their fair share.