CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - Tools Of Government Economic Policy - Notes ^{8 / 17}

Tools of government economic policy

In order to achieve its objectives, a government has several types of macroeconomic policy instruments:

1. Fiscal policy

2. Monetary policy

3. Supply-side policy

Fiscal policy

relates to

1. Taxation

2. Public Borrowing and Spending

Monetary policy

relates to:

1. Money Supply

2. Interest rates

3. Exchange rates

Fiscal & monetary policies

• Fiscal and monetary policy attempt to influence Aggregate demand

• Fiscal policy is more directly under the control of government.

  Monetary policy is normally controlled by independent Central Banks.

• Changes to monetary policy can be implemented more quickly, eg interest rates can be changed every month, while tax and spending decisions (fiscal policy) are normally only changed annually.

Supply-side policy

Supply-side policies, on the other hand, attempt to increase the level of Aggregate supply by increasing efficiency, motivation or productive capacity.

Examples include deregulation, re-training, privatisation and cutting corporation tax.