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Chapter 7

Fiscal and monetary policy options

9.1 Introduction

Governments have two main ways of affecting the economy.

Fiscal policy – refers to the government’s taxation and spending plans.

Monetary policy – refers to the management of the money supply in the
economy.

In particular, monetary policy involves changing of interest rates or varying of the
amount of money that banks need to keep in reserve.

9.2 Fiscal policy options

The two key elements that government must plan for each year are:

 Income – this is primarily the money the government raises from direct and
indirect taxes on individuals and businesses.

 Expenditure – this is the total amount the government will need to spend to
provide services for the population.

In the medium- to long-term, most governments would prefer to run a balanced
budget. This occurs when government income and expenditure are exactly
matched.

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