2.6.2 Demand-side policy GapFill

There are two primary types of demand-side economic policy: fiscal and monetary. It is important that you understand the distinction between the two, their strengths and weaknesses, and how they are used in response to economic phenomena.

There are two primary types of monetary policy. The first and most commonly known is the setting of   interest ratesgovernment spendingthe money supplytaxation, and the second is the expansion of  interest ratestaxationthe money supplygovernment spending. Both policies aim to influence levels of aggregate demand in the economy and control inflation. The inflation target in the UK is  1%2%1.5%2.5%, and monetary policy is set by   the Chancellorthe Bank of Englandthe governmentthe Treasury's Monetary Policy Committee. Monetary policy is usually used in a counter-inflationary way.

There are also two primary types of fiscal policy. The first,  the money supplygovernment spendingtaxationinterest rates, is sometimes also known as 'fiscal stimulus' and funds public services and infrastructure. The second,  the money supplyinterest ratesgovernment spendingtaxation, can be either direct, such as when it is placed on  goodsincomesflowsstocks, or indirect, such as when it is placed on  flowsstocksgoodsincomes. Fiscal policy is set by the government and also aims to stimulate aggregate demand, as well as to redistribute wealth to reduce inequalities and other negative externalities in society. Fiscal policy is usually used in a countercyclical way.