Fiscal policy is the manipulation of government spending (G) and level of taxation while monetary policy is the adjustment of interest rates. Both are meant to influence the movement of AD
First, Monetary Policy Committee (MPC) can consider a cut in interest rates. With cheaper borrowing, households will be induced to borrow even more to spend. Rise in consumption (C) will shift AD rightward thereby promoting higher economic growth. To produce more goods and services, more manpower will be required. This leads to lower unemployment. At the same time, lower rates will lead to outflow of money. Wealthy foreigners and pension funds would want to seek better return by placing their money in other countries that offer more favourable rates. Such process, leads to rise in supply of pound in foreign exchange market, thus weakening its value. Somehow, UK’s exports will gain competitiveness ground. This should be able to solve the first imbalances and that is declining manufacturing output and yet a rise in employment