• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Using the data and your knowledge of recent economic events, assess the contribution that fiscal and monetary policies can make in maintaining a stable economy

Extracts from this document...

Introduction

AS ECONOMICS UNIT 2 FISCAL POLICY MODEL ANSWERS JANUARY 2011 a) Using extract D identify two significant points of comparison between public sector revenue and public expenditure over the period shown (8 marks) > Throughout the period, public spending as a share of GDP is always higher than tax revenue as a share of GDP (2) - approximately 3% of GDP up to 2007/08 (2) > The gap between the two is smallest at the beginning - about 3% (2) and highest at the end about 9% (2) > Both grow as a share of GDP up until 2007/08 (2) - Spending rises from 39% too 41% and tax receipts rise from 36% to 38% (2) > After 2007/08 spending rises rapidly, from 43% to 46% of GDP (2), whilst tax receipts fall and then rise staying about 38% of GDP (2) > The gap between is spending and tax receipts of forecast to widen rapidly after 2008/09 (2) from 5% of GDP to 9% of GDP (2) b) Explain two ways in which fiscal policy can influence the pattern of economic activity reasons (12 marks) ...read more.

Middle

Fiscal policy involves the use of government spending and tax receipts to influence the level and pattern of economic activity, whilst monetary policy uses interest rates to achieve the same. Fiscal and monetary policy can be used to influence short term AD with the aim of promoting a steady rate of economic growth, low unemployment and low inflation. In a recession there will be a loosening of monetary policy when interest rates are cut and a budget deficit run with the aim of boosting AD throughout the economy. This is what is happening at the moment in the UK as the economy slowly comes of out recession. Interest rates are down to 0.5% and income tax rates are slowly being cut to act as a incentive to workers to work harder and boost productivity. However, as we see in the UK economy these policies are having a very slow impact on growth. Consumer confidence and business confidence is very low and when this happens cuts in interest rates and taxes will not encourage household and consumers to spend more. They may be tempted to use the extra money to save more and pay off debt rather than spend and this could hinder economic recovery. ...read more.

Conclusion

Such policies as spending government money on education and training will improve productivity and provide a boost to the supply side of the economy. Other policies such as reducing benefits to encourage unemployed people to enter work will help boost AS in the economy. However whilst supply side policies can help boost output, there needs to be increases in AD at the same time to ensure that there is sufficient spending to buy up the extra output. It is therefore important to ensure that fiscal and monetary policy works on both the demand side and supply of the economy if it wants to promote economic stability. In conclusion, there are a range of fiscal and monetary policy measures the government can use to promote economic stability. It is important that policies work on both the short term AD side of the economy and long run AS of the economy so that there is a balance at play. Also stability in the economy might be affected by what is happening in other world economies and it becomes difficult for fiscal and monetary policy to work effectively if the Uk economy is affected by the working of other economies and also any economic shocks which might occur in the wider world economy. Analysis in normal type - evaluation in italics ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Peer reviewed

    Stimulating an economy in recession

    5 star(s)

    Supply side policies implemented by the government may be privatization and deregulation to increase competition in the market, reducing unemployment benefits to encourage employment, decrease income tax as an incentive to work, and decrease tax on dividends(share of company profits paid to shareholders)

  2. Explain how fiscal policy can be used to influence both thelevel and pattern of ...

    The increase in government spending and decrease in tax revenue due to the increase use of social security benefits are described as automatic stabilisers and help to reduce the severity of a recession or slump. If the government reflates AD by reducing taxation, or by increasing government spending, then this may lead to a budget deficit.

  1. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    6.2.2 Multi-Culture Malaysia as a multi-cultural and multi-ethnic nation shares close ethnical and cultural similarity with many immigrants' source countries. This factor helps the immigrants to assimilate into the society and gain employment. 6.3 Factors of the Trend of Immigrants in South Africa 6.3.1 Government Immigration Policies In order to

  2. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    In the long run this will cause more inflation as the price rises caused by shifts in the aggregate demand line will lead to a shift in the short run aggregate supply line. There is another theory as why there can be increases in the prices of goods and this

  1. Budget 2004-05 and Economic Analysis of Pakistan

    for: * Healthcare * Education * Technical Education * Agriculture * Irrigation * Hydel Power Generation * Agriculture Research * Housing and Construction, Etc. CHALLENGES FOR THE FEDRAL BUDGET 2004-05 The budget for 2004-05 plans to address some very pressing challenges and take measures to overcome them.

  2. Using the data and your economic knowledge, evaluate the contribution that the growth of ...

    If the increased level of potential output is matched with increases in AD, it is expected that there will be an increase in national output with falling price levels. The factors that affect LRAS are called supply-side factors. This is what the government aims to achieve as they aim to improve productivity in the U.K.

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    out of a total managed expenditure of �418 billion compared to �65 billion spent on the NHS. Unemployment, particularly amongst the young, leads to increased crime, violence and vandalism, which destroys the local community. Areas if high unemployment tend to be run down, which would have a knock-on effect to

  2. This paper will begin by detailing the creation of money and then end with ...

    Discount Rate The Discount Rate describes the interest rate at which the Federal Reserve lends to commercial banks. This rate differs from the Federal Funds Rate, which is the rate at which banks (and other private depository institutions) lend money to other banks (or other private depository institutions).

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work