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

Compare the effectiveness of the fiscal and monetary policy with some reference to supply side policy in running the UK economy. Fiscal policy is used to change taxation and government spending in order to control the level

Extracts from this document...

Introduction

Economics Homework **Compare the effectiveness of the fiscal and monetary policy with some reference to supply side policy in running the UK economy. Fiscal policy is used to change taxation and government spending in order to control the level of aggregate demand, which can reflate or deflate the economy. Monetary policy is the control of money supply by changes in interest rates that affect bank lending, which then changes the level of AD. Fiscal policy is far more effective than the monetary policy as it can target many things, whereas the monetary policy is limited on its effectiveness. Fiscal policy can be very effective when used at the right time, such as in a deep recession, because fiscal policy can cause a multiplier effect which can create jobs quickly and it gives people a boost in confidence, which then increases spending and investments. ...read more.

Middle

When this happens fiscal policy will just continue to rise inflation, at a time like this both monetary and fiscal should be used at once. This is where monetary policy will be effective. Here monetary policy should be used to deflate the economy, which will slow down inflation and cause a drop in spending. Also by using monetary policy to cut interest rates, it will lower the pound causing our trade figures to improve significantly. Our trade figures improve because hot money leaves and the pound depreciates and causes exports to eventually rise and imports to fall which improves our current accounts, which is very good and effective in running the economy. The rise in exports will make more jobs available through the multiplier effect which in a long run should bring the economy back onto its feet. ...read more.

Conclusion

The best thing to do is to make small changes to interest rates this way it will make gentle changes to the total money supply. Monetary policy also requires a strong government who knows what they are doing, as it can be used at the wrong times. For example if a country was at full employment it might decide to devalue their economy, but this will cause severe problems of shortages and inflation. This is because the extra AD cannot create extra jobs or output due to the country being at full capacity, instead of expanding it will just increase inflation. The solution to this is to use supply side policies as it can reduce the natural rate of unemployment, allowing mild reflation through the fiscal and monetary policies, so it creates more jobs without causing inflation to increase. ?? ?? ?? ?? ...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 Macroeconomics section.

Found what you're looking for?

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

Here's what a star student thought of this essay

3 star(s)

Response to the question

This essay engages with the effectiveness well, yet there isn't enough analysis. In my experience, to be rewarded for evaluative comments as this essay has done, you must have some analysis. This can be an explanation of how fiscal or ...

Read full review

Response to the question

This essay engages with the effectiveness well, yet there isn't enough analysis. In my experience, to be rewarded for evaluative comments as this essay has done, you must have some analysis. This can be an explanation of how fiscal or monetary policies work, including a diagram. But, you are risking getting incredibly low marks if you don't build up an essay in response to this question. I would start by defining what the various policies are, then analysing how they work, then evaluating why different qualities will affect their effectiveness, coming to a justified judgement.

Level of analysis

As mentioned above, there isn't enough analysis here, but there is plenty of good evaluation. I liked the awareness that fiscal policy is subject the multiplier, giving it a strong benefit. Sometimes the essay asserts things without being clear. For example they say "fiscal policy is far more effective than the monetary policy as it can target many things" yet it is not made clear that government spending is a direct component on aggregate demand. You must be clear what you mean, as an examiner cannot assume you have the understanding. Diagrams would have been useful in places, for example saying "SS policies are also very effective in curing a weak economy, because it improves all four objectives" seems unfounded without a diagram showing a shift in aggregate supply placing downwards pressure on the price level. I think there needed to be some discussion of examples of the policies. Supply side policy as a general term is used, but I would've looked at investment in education and training for example. This would've allowed evaluation, saying the time lag is substantial. But, to get top marks in this essay, there needed to be a discussion of "the effectiveness depends upon" as there isn't a clear cut answer for every situation. Such perceptive debate would've been strong.

Quality of writing

The structure here is poor, as it skips out the analysis stage. The introduction is quite weak, as technically fiscal policy is the manipulation of taxation and government spending. I felt the language used here is colloquial at times, for example "fiscal and monetary policies can’t just be used by anyone" doesn't sound sophisticated. This style doesn't come across as very convincing, detracting away from the essay's quality parts. Spelling, punctuation and grammar are fine.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 19/03/2012

Read less
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 Macroeconomics essays

  1. Peer reviewed

    Discuss the effectiveness of a fiscal policy in reducing unemployment

    5 star(s)

    a loose fiscal policy will still increase aggregate demand but it will not increase employment but will only increase inflationary pressure and no economic growth. In conclusion, the increase in government expenditure and cut in taxation will only be effective in a short run however there are limitations in its

  2. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Governments are also advised to adopt deregulation. This is the removal of laws which hinders growth of supply, similar to removing red tape, deregulation means producers have more room to grow and are not constrained by the law. Exchange rate policies can also be used to influence and reduce inflation.

  1. Free essay

    Should the Government be Prepared to Increase Spending in Order to Eliminate Unemployment?

    3 star(s)

    They can they employ more workers and the cycle continues. Unemployment is something that should not be looked at lightly. There are many negative social effects that can occur as a result of unemployment. A government that looks as if it is not coping with or tackling the problem of

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

    Supply side policies can be used to directly target a particular type of unemployment. The government can deal with frictional unemployment by improving the flow of information to unemployed workers, thus improving employment services. Additionally, by reducing the benefits of the short-term unemployed and improving the mobility of labour, frictional unemployment can be reduced.

  1. What are the government objectives? Explain why each is important and how the government ...

    The maintenance of low inflation levels is important to a government as they have a direct effect on unemployment, household's disposable incomes, firm's profits and the level of investment. The government can attempt to reduce or maintain low levels of inflation using various policies.

  2. Free trade and protectionism

    Another method of protectionism is exchange rate manipulation. The government sells its currency in the foreign exchange market so as to lower the value of Pound. Therefore, the cost of imports will be higher than before, and exports seem more sensible.

  1. Evaluate the use of supply side policies in raising the level of real output ...

    Also, cutting taxes could lead to/worsen the budget deficit. The problem with privatisation is in the UK, there is not much left to privatise, and also it could lead to private monopolies which can exploit consumers. The use of supply side policies to increase the level of real output in an economy which is at full recession is likely

  2. A report into supply side policies in the UK.

    Another policy that can be used is that of increasing the amount of money earned before taxes and making the taxation on the rest lower. This would increase supply as people would see it as an incentive to work as they would be better off with it, than for example living off of benefits.

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