Part of The Student Room Group

  • 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

or


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. Marked by a teacher

    Current UK economic policies. Government management of the economy is a key political issue ...

    4 star(s)

    Reflationary monetary policy involving reductions in interest rates to very low levels to deal with crisis situations tend to have very limited effect on an economy because consumers and workers refuse to spend until they are confident the crisis is over.

  2. Peer reviewed

    Stimulating an economy in recession

    5 star(s)

    Trade Union power was diminished and income taxes were lowered. The policies proved to be effective in this example as productivity produced growth rates. However, supply side policies have negative effects in society. Tax cuts increase budget deficits which lead to a decrease in transfer payments or funds for social welfare.

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

    Workers who fail to negotiate pay increases will have less real income and will also be worse off. If interest rates fall due to inflation, savers will be worse off, however those who have mortgages and loans will be better off, in the sense that they have less to pay back.

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

    increase the immigration of skilled foreign workers, in particular from other developing countries the South African government recently has introduced several measures to attract foreign workers. Recent developments of immigration trends reflect changes in immigration policies, so as to recruit skilled foreign workers as well as other types of foreign labor.

  1. Outline any two main/priority issue that concern the Australian economy & discuss the effectiveness ...

    large part of the income debits that flow out on the current account. Thus, today's foreign debt adds to future CAD's. Because Australia finances a large proportion of its CAD by borrowing from overseas, this in turn ensures that Australia's foreign debt will continue to grow.

  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. Free essay

    the trend growth rate and measurements of economic welfare

    The effect of this quick fire selling is that the speculative bubble bursts very quickly, this implosion inevitably destroys consumer and business confidence. This then unfortunately leads to an economic recession as consumers cut back dramatically on their spelling. Political business cycle theory applies to democratic countries which have national elections every four or five years.

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

    The Federal Reserve may increase the money supply by purchasing government bonds from commercial banks and securities from the public. Government bond purchase directly increases the reserves of a bank, allowing greater potential for lending which increases the money supply.

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