• 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)

    is a component of AD and would then lessen the impact of recession. This is shown in figure III as AD shifts from AD1 to AD2. To stimulate an economy in recession using the AS curve supply side policies are used.

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

    Therefore, when immigrants communicate and interact with the locals, the locals can learn many new things such as new skills, languages, and also broaden their knowledge. Other than that, there would be intercultural marriage between the immigrants and also the locals.

  1. 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.

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

    This will reduce the number of people trying to buy pounds, which reduces its value on the exchange rate markets. This will give the UK a more competitive edge internationally, therefore increasing the amount of exported goods. All of these things have meant that inflation will have happened in the short run.

  1. Budget 2004-05 and Economic Analysis of Pakistan

    These include: * The need to push the growth rate 8% and above so as to have meaningful reduction in poverty. For this purpose significant increase in investment is required especially in the private sector. * The need to improve human development indicators which will fall for substantial increase in social planning.

  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. Australia's place in the global economy - "Explain the reasons for our current exchange ...

    The second cause is the slow recovery by Australia experienced from the 1997 Asian Economic Crisis. "Australia had to maintain low interest rates, which was caused by Asian deflation... Rates rose around the world in 1999 and 2000, as did oil prices, and both slowed global growth."

  2. The UK fiscal policy.

    In this case it is called as deflationary policy. Alternatively the needs the deflationary policy, and the fiscal policy can also be used to affect the supply side. According to the research on the react fiscal policy of the UK, with emphasis on taxation, the current trend of a shift in the balance of taxation can be identified.

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