Capital allowance is when business has the ability to claim tax allowances on things that they have purchased or investments that they have made. These claims are made against the taxable profits made by the business and help to reduce tax payments. AL-MURAD can claim capital allowance. This will help AL-MURAD to keep reinvesting in them for the future. This can help them cope with labour cost and increase the costs and make profit.
Monetary policy is a policy that aims to control the money supply in the economy. Monetary policy works by influencing the rate of interest that is offered by the central bank within which is operating. It influences the money supply and the way the exchange rate works in a country.
By keeping interest rates at a low level, aggregate demand is stimulated as more money is available for people to spend. It is cheaper for AL-MURAD to borrow money and invest in their own business. This can affect whether the external investors of AL-MURAD want to invest in UK or not. A fall in interest rate will affect the confidence of investors from overseas who want a larger return on their money. This can affect AL-MURAD as the external investors might not invest in AL-MURAD which can lead to AL-MURAD compromising with their costs. Reducing the exchange rate can occur by lowering interest rates or selling sterling. Raising interest rates and buying foreign currency will have the opposite effect as this will reduce aggregate demand and reduce inflation. During the low interest rate AL-MURAD will have more demand of products as people will be buying their products. They are more likely to even increase the cost. If AL-MURAD is making very high profit then they can even have a high labour cost which will be affordable for their business.
Inflation is the measurement of the increase in prices. The target for the UK government is to keep inflation at around 2 per cent to support employment and economic growth. Two per cent inflation gives stability to the economy so it is just as bad to be below 2 percent as it is to be above it. Monetary policy influences inflation because the rates of interest affect spending and therefore demand. Monetary policy also affects the supply of money, again influencing demand and costs, and therefore inflation. The government wants to keep the inflation rate low while having high employment rate which is not very hard as the people will stop spending money due to the low inflation. This will put AL-MURAD in a critical situation where AL-MURAD will have to compromise as they will be having fewer customers which lead to less profit but due to the government law they cannot have low employment. AL-MURAD will have to pay all their workers which will be very hard as the inflation is low.
Employment levels are also affected by monetary policy. Keeping inflation at around 2 per cent means that wage increases should be around this level too. This controls cost-push inflation. Low inflation tends to mean that workers are more secure in their jobs because costs are kept stable. If inflation levels are high, the cost of wages is high and employers may try to control this by reducing their employee numbers, which then leads to a reduction in aggregate demand. This means that even AL-MURAD would tend to do so. They would even want to get rid of some of their workers as high employment would take their business to a loss site. AL-MURAD can face problems due to the employment rate being high as they will have to take on more workers as well. A good supply of money in the economy means that businesses should feel confident to invest in the future by taking on new employees. If more people are working, aggregate demand is likely to go up and, therefore, business confidence should go up again as more spending takes place. This will benefit AL-MURAD as their business confidence will rise and they will be able to spend more money on new machinery and other appliances and they will try to open new factories. But if the inflation was low and employment was high AL-MURAD will have to compromise on this as well, as they won’t have enough money in the business to spend.
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humzah2013hotmailcom (student)
