Government management of the economy is a key political issue and each government sets targets and objectives. These are: stable economic growth, low stable inflation and low unemployment rates.
UK government, similarly to all governments around the world, uses different policies to achieve the main objectives listed above.
Economic growth can be achieved by using policies in the short and long run. One of the policies that can be used is a monetary policy. In theory, reflationary monetary policy is to reduce interest rates. The lower the interest rates are, the higher economic growth is. What is more, it increases bank lending. People are more likely to borrow money from banks as they feel confident. This is because of the low interest rates and the awareness that they do not have to give back much more than they had lent before. Moreover, reflationary policy lowers value of ŁSterling because the value of UK currency becomes cheaper in comparison to other currency’s. All these factors causes an increase in AD and overall the economic growth.
Another short-run policy to increase economic growth to the UK objective level, i.e. 2.25%, is a fiscal policy. A reflationary fiscal policy is used and results in reducing taxes and raising government spending. Reduction in taxes cause that people have more money to consume. As a result they spend more. Government spending increases and it causes AD to rise.