A monetary policy rule (MPR) specifies how the central bank adjusts interest rates in response to changes in particular economic variables.

Following a monetary target, the central banks adjusts interest rates to maintain the quantity of money demanded in line with the given target for money supply.

The IS schedule shows combinations of income and interest rates at which aggregate demand equals actual output. The LM schedule shows combinations of interest rates and income yielding money market equilibrium when the central bank pursues a given target for the nominal money supply.

A fiscal stimulus to aggregate demand crowds out some private spending. Higher output induces a rise in interest rates that dampen the expansionary effect on demand by reducing some components of private spending.

Demand management uses monetary and fiscal policy to stabilize output near potential output.

Government solvency requires that the present value of the current and future tax revenue equals the present value of current and future spending plus any initial net debts.

Ricardian equivalence says that it does not matter when a government finances a given spending programme. Tax cuts today do not affect private spending if, in present value terms, future taxes rise to match.