Explain the difference between fiscal policy and monetary policy.
Firstly, let's define each Government demand side policy. Fiscal policy is the use of taxation and Government spending to control aggregate demand and hence growth. Monetary policy is the use of interest rates, set by the Bank of England, to manage aggregate demand, and again growth. Both policies are used to stimulate or limit growth in the economy, and additionally impact inflation levels in the UK. The UK Bank of England has set a target of inflation at 1% above or below 2% of CPI.
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