Governments are tasked with maintaining a level of integrity and stability in an economy. They, through their agencies set various policies that allow them to influence parts of the economy including; interest rates, cash flow, budget surplus / deficit, supply and demand and the rate of inflation. By changing one or more if these policies the government can alter economic conditions and shift the direction the economy is heading, for example if the economy is heading into a recession, the government may implement a stimulus package and give money into the economy to stimulate spending.
Fiscal policy refers to government borrowing, spending and taxation. Changes in government attitudes towards how it spends / saves its money can impact the economy in a few ways; it can aggregate demand and the overall level of economic activity, change the pattern of resource allocation and alter the distribution of income. Fiscal policy refers to the overall effect of the budget on economic activity, it has three outcomes: neutral when government spending equals its income from taxes, expansionary when government spending exceeds its revenue from tax often leading to a budget deficit or contractionary when tax revenue exceeds government spending often leading to a budget surplus.
Interest rates form a large part of a governments control over an economy, by changing interest rates the government can influence spending, saving, lending and borrowing all at once, this allows them to effectively control the rate of economic growth and soften a downturn or recession in the economy.
Monetary policy attempts to stabilize the economy by controlling interest rates and the supply of money. It is referred to as expansionary policy if it increases the total supply of money in the economy or decreases the interest rate and a contractionary policy if it decreases the total money...