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fixed percentage
of the price of the good. 
9.5 Tax and income levels 
Note the following distinctions. 
(a) A 
regressive tax
 
takes a higher 
proportion 
of a poor person's salary than of a rich person's. 
Television licences and road tax are examples of regressive taxes since they are the same for all 
people.
(b) A 
proportional tax
 
takes the 
same proportion 
of income in tax from all levels of income.
(c) A 
progressive tax
 
takes a 
higher proportion 
of income in tax as income rises. Income tax as a 
whole is progressive, since the first part of an individual's income is tax free due to personal 
allowances and the rate of tax increases in steps in the UK from 20p in £1 to 45p in £1 as 
taxable income rises. 
Direct taxes 
tend to be 
progressive 
or 
proportional
. Income tax is usually progressive, with high rates of 
tax charged on higher bands of taxable income. 
Indirect taxes 
can be 
regressive
, when the taxes are 
placed on essential commodities or commodities consumed by poorer people in greater quantities.
 
10
Monetary policy 
Monetary policy 
uses money supply, interest rates or credit controls to influence aggregate demand.
Monetary policy: 
government policy on the money supply, the monetary system, interest rates, 
exchange rates and the availability of credit. 
Monetary and fiscal policies attempt to attain the macroeconomic policy objectives by influencing 
aggregate demand. 
QUESTION 
Effects of policy
 
How are businesses affected by fiscal and monetary policy? 
ANSWER 
Businesses are affected by a government's tax policy (eg corporation tax rates) and monetary policy (high 
interest rates increase the cost of investment, and depress consumer demand). 
 
10.1 Objectives of monetary policy 
Monetary policy can be used as a means towards achieving ultimate economic objectives for inflation, 
the balance of trade, full employment and real economic growth. To achieve these