Government and the Macroeconomy · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 16% of your exam marks.
Fiscal and monetary policy are core Section B evaluate topics; expansionary vs contractionary, tools and limitations tested consistently.
Governments and central banks have two main demand-side toolkits for managing the economy. Each is set by different people and works through different mechanisms, but both ultimately act on (total spending in the economy).
| Policy family | Who controls it | Main tools | Acts on |
|---|---|---|---|
| Fiscal policy | The government (treasury / finance ministry) | Taxes and government spending | Aggregate demand |
| Monetary policy | The central bank | Interest rate, money supply and (sometimes) the foreign exchange rate | Aggregate demand |
Both are demand-side policies: they try to lift or lower aggregate demand to pursue the macroeconomic aims of topic 12. The third toolkit, supply-side policy, raises the economy's productive capacity instead and is covered in its own topic.
This topic walks through each family, the tools each uses, and the limitations to be aware of.