Government policies

1) Fiscal policy – the taxation and spending decisions of a government
• Reflationary of policy: measures designed to increase AD
• Deflationary of policy: measures designed to reduce AD
To influence AD government may use:
Disccretionary fiscal policy – deliberate changes in government spending and taxation designed to influence AD
Automatic stabilizers – forms of government spending and taxation that change automatically to offset limitations in economic activity
Types of taxes:
1)progressive tax – that takes a higher percentage of the income of the rich ( income tax)
2) Regressive tax – that takes a greater percentage from the income of the poor ( VAT, excise duty, corporation)

Government spending:
• Capital expenditure (hospitals, schools)
• Current spending (public services)
• Transfer payments (benefits to unemployed, pensioners)
• Debt interest payments ( payment to government debt holders)
2) Monetary policy – central bank/ government decisions on the rate of interest, money supply and exchange rate
3) Supply – side policies – policies designed to increase AS by improving the efficiency of labour and product markets ( E.g. reduction in direct taxes, national minimum wage, reduction in unemployment benefits, privatization, deregulation)
Policies to control Inflation:
- Cost – Push inflation  restrict wage rates, reduce taxes
- Demand-Pull Inflation  deflationary fiscal, monetary
Policies to improve Balance of Payments:
 Exchange rate adjustment
 Deflationary demand management
 Import restrictions
Protectionism: 
o Tariffs
o Quotas
o Voluntary Export Restraint – the limit on imports arises from a voluntary agreement between the exporting and importing country
Foreign Exchange Restrictions:
o Embargoes: ban on X or M
o Red Tape