Asses the contribution that fiscal and monetary policies can make in maintaining a stable economy.

Both monetary and fiscal policies are aimed at keeping the economy in a stable condition by reducing inflation and aggregate demand respectively. A stable economy can be described as an economy experiences good levels of economic growth while maintaining low levels of inflation and unemployment. The low levels of unemployment can be achieved via fiscal policies such as subsidising certain industries to increase supply and therefore lower the price level,which would provide incentives for consumption, and therefore if consumption rises then AD should rise causing firms to need to increase supply, which can be achieved by increasing the labour force to achieve a higher output. An example would be the government subsidising the electric car industry to provide incentives to producers to increase supply by increasing the labour force and decreasing unemployment.

Monetary policies can then be used by the bank of england in order to control inflation. For example the bank of england can set the interest rates in order to increase or decrease the cost of borrowing. If interest rates are increased then inflation should decrease as consumption and investment will fall. This will then help then help the bank of england hit the inflation targets set by the UK government, these currently stand at 2%. Monetary policies are extremely useful in prevent economic downturn as if inflation is controlled via monetary instruments like interest rates then AD will remain high while the price level does not soar causing inflationary pressures. However monetary policies can also have a negative effect on the economy, for example if inflation is kept at a lower level via the use of high interest rates then AD could potentially fall as firms will not want to risk larger investments, so