Fiscal and monetary policy - a comparison

fiscal and monetary policy - comparison Introduction Fiscal policy should not be seen is isolation from monetary policy. For most of the last thirty years, the operation of fiscal and monetary policy was in the hands of just one person - the Chancellor of the Exchequer. However the degree of coordination the two policies often left a lot to be desired. Even though the BoE has operational independence that allows it to set interest rates, the decisions of the Monetary Policy Committee are taken in full knowledge of the Government's fiscal policy stance. Indeed the Treasury has a non-voting representative at MPC meetings. The government lets the MPC know of fiscal policy decisions that will appear in the annual budget. Impact on the Composition of Output Monetary policy is seen as something of a blunt policy instrument - affecting all sectors of the economy although in different ways and with a variable impact Fiscal policy changes can be targeted to affect certain groups (e.g. increases in means-tested benefits for low income households, reductions in the rate of corporation tax for small-medium sized enterprises, investment allowances for businesses in certain regions) Consider too the effects of using either monetary or fiscal policy to achieve a given increase in national income because actual GDP lies below potential GDP (i.e. there is a negative output gap)

  • Ranking:
  • Word count: 927
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore.

Song Teck 023A 4a.) Explain the possible impact of a world-wide recession on the components of the circular flow of income for a small and open economy such as Singapore. [10m] The circular flow of income for an open economy is a model that shows the flows of goods and services and factors of productions between firms and household and in the process injections and withdrawals are made by the government and the rest of the world. This model shows that household provides the factors of production for firms who produce goods and services. In return the factors of production receive the factor payments (such as wages, dividend, and profits) which are in turn spent on the firm's output. The circular flow of income can be expanded by injections (addition to the circular flow which does not come from the domestic expenditure of the household in the form of investment, government expenditure, export revenue) and reduced by withdrawals (any part of income not passed on within circular flow of income in the form of savings, taxes, imports). Being a small and open economy, Singapore have place a strong emphasis on export orientated growth due to our small domestic market, thus resulting in a strong dependence on export revenue to sustain our economic growth. Moreover, with limited domestic investment and the openness to international capital flow, we are more dependent on foreign

  • Ranking:
  • Word count: 904
  • Level: AS and A Level
  • Subject: Economics
Access this essay

'The trade deficit on goods in the first three months of the year was £7.1bn.' Explain the meaning of this statement.

Bernice Berschader 'The trade deficit on goods in the first three months of the year was £7.1bn.' (a) Explain the meaning of this statement. The above statements states that between January and March 1999 the UK lost £7.1 billion on trade, as a result of a trade deficit or current account deficit on the Balance of Payments. A Current Account deficit is where imports into a country exceed exports. This leads to a disequilibrium of injections and withdrawals. Withdrawals from the circular flow of income exceed injections into the circular flow of income. Though the current account consists of 4 elements, visible goods, invisible services, net income and investment income, the statement above discusses the deficit of an element of the current account, the visible goods element Even though a current account deficit results in the value of imported goods exceeds the value of exported goods, the demands for exports and imports will not be affected in the short run due to the Martial Lerner Conditions. Though eventually this will result in the foreign currency price of UK exports to decline, it will take some time for countries to react to these changes. In the short run the volume of exports will remain the same before it increases as a result of devaluation in the long run. This is illustrated by the J-Curve effect below. (b) Examine the possible causes of

  • Ranking:
  • Word count: 1400
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Examine two reasons why a government might wish to control increases in its expenditure

Examine two reasons why a government might wish to control increases in its expenditure Increases in government expenditure will shift the Aggregate Demand (the sum of all demand within an economy) outwards. This is called an expansionary fiscal policy (fiscal meaning relating to government spending), and may be implemented to stimulate an economy if it is in recession. Another type of fiscal policy is called contractionary fiscal policy, and is used to help control demand pull inflation. Demand-pull inflation is the increases in prices at a relatively higher rate than increases in income. This occurs when demand is greater than supply. A government may wish to control increases in its expenditure for a number of reasons, including controlling the extent of government intervention, letting market forces act and to prevent crowding out. The two reasons that I will examine are to keep the tax levels down and to control inflation. Taxes are placed in two categories. First there is direct tax, which is tax levied directly to a person or organization, for example income tax. The second category is indirect taxes, which are taxes placed on goods and services. In Australia, the main indirect tax is the Goods and Services Tax (GST). This is relevant to the governments expenditure plan because of the affect increases or decreases in expenditure will have on the budget, which is a

  • Ranking:
  • Word count: 879
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Discuss the economic effects of a reduction in unemployment

Discuss the economic effects of a reduction in unemployment (18) One of the main government policy objectives is high employment or most of the countries even aim for full employment, which is a term for unemployment at 3%. This is because government acknowledges that employment benefits individuals, government itself and in most cases the whole society, as it can cause a sustainable economic growth and raise people's material standard of living. However, every single country has some degree of unemployment, as it is impossible to avoid, so government uses different policies to reduce as much unemployment as possible. These policies are demand side policy, which is increasing the AD to reduce unemployment and supply side policy which means increasing the AS using different methods and with it increasing the need of the labour. Using these two policies the unemployment will be reduced and the effect of reducing the unemployment is usually beneficial rather than detrimental, but I will discuss both sides in this essay. The most apparent and significant effect of the reduction in unemployment is the gain in output, as more people who are willing and able to work are working and this means that the country will be using the resources more efficiently. This will lead to a higher production in goods and services and increasing the material living standards. We can present this

  • Ranking:
  • Word count: 631
  • Level: AS and A Level
  • Subject: Economics
Access this essay

How does level of aggregate demand affect level of unemployment

To what extent can government attempts to influence the level of aggregate demand affect the level of unemployment The government can attempt to influence the level of Aggregate demand through Fiscal policy and Monetary policy. If unemployment is relatively high then either interest rates can be lowered to expand demand (Monetary Policy) or, alternatively, the government could lower taxes and boost government spending (Fiscal policy). These measures should expand demand and lead to a fall in unemployment but the overall impact of both policies can be quiet different. Unemployment can be caused by both demand side and supply side factors. On the demand side unemployment is attributable to Demand Deficient Unemployment or Cyclical Unemployment. Here workers are unemployed simply because there is insufficient demand to provide them jobs. Clearly attempts by government to boost demand by either policy will lower this type of unemployment. However, supply side unemployment needs careful consideration. Supply side has several different causes such as frictional, structural and technological or real wage unemployment. Frictional is basically workers moving between jobs and is sometimes referred to as 'the oil that lubricates the labour market'. Although some economists may argue the fact generally frictional unemployment is unavoidable in a market economy. Structural is mismatch

  • Ranking:
  • Word count: 682
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Discuss whether deflation or inflation is a more serious problem for the economy

Discuss whether inflation or deflation is a more serious problem for an economy (12) To begin with we need to define the terms inflation and deflation. The term inflation is defined as a general and sustained rise in prices. The term deflation is opposite to this and is defined as a reduction in the general level of prices sustained over several months, usually accompanied by declining employment and output. An advantage of inflation for an economy can be it helps smaller firms grow larger. This is beneficial to the economy as it helps unemployment to reduce and increases morale for those smaller firms. Inflation will help firms and individuals who have built up debts as the rate of interest does not fully compensate for the increase in the general price level. This ultimately leads to the real level of debts falling therefore debts become more manageable. A disadvantage of inflation for an economy is a possible loss of competitiveness. For example, if the UK has a higher inflation rate than the rest of the world, its price competitiveness in international markets will fall. A rise in a country's relative inflation rates may lead to a fall in its world share of exports and a consequent rise in import penetration. This ultimately leads to a fall in the rate of economic growth and the level of employment. Another disadvantage of inflation for any economy is the

  • Ranking:
  • Word count: 642
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Defining Aggregate Demand and Aggregate Supply

Defining Aggregate Demand and Aggregate Supply First of all we need to start by defining Aggregate Demand itself. Aggregate Demand can be defined as the total demand in the economy for goods and services at a given time. The formula for Aggregate Demand is important in that is allows us to look at Aggregate Demand in detail. AD = C + I + G + (X-M) Before we move on we must define the components of this formula. AD is the Aggregate Demand. C is the level of consumption in the economy by consumers. I is the investment that occurs in the economy, done mainly by firms. G is the level of Government investment in the economy. X is the level of exports in the economy, while M is the level of imports in the economy. Now the arrangement of the formula is important too. Firstly we can see that C, I, G and X are positive while the M component is negative. This is because the consumption level will have a positive effect since consumer buying goods raises the money flow in the economy. Investment will also have a positive effect since more companies investing will raise the level of money available as more companies buying factories will have a positive effect since they will be able to buy bricks to build the factory raising demand for bricks. Government expenditure has a positive impact since it means that for example consumers will have more money to spend if G is in the form of

  • Ranking:
  • Word count: 805
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Discuss the effectiveness of expansionary monetary policy in achieving an increase in Aggregate Demand in an economy

Discuss the effectiveness of expansionary monetary policy in achieving an increase in AD in an economy Expansionary monetary policy is monetary policy which is designed to increase aggregate demand. This is achieved, by channelling more savings into investment, therefore if expansionary monetary policy has forced an increase in aggregate demand (AD), and then there will be more capital/ cash available to flow around the country. This increase in aggregate demand is forced by a decrease in interest rates. By decreasing interest rates, it is easier to take out a loan, and therefore people will have more confidence to increase their personal spending. Furthermore, if interest rates fall, homeowners who have variable rate mortgages, will have a much higher amount of expendable cash to spend (as shown in the graph below). Although, in the short run, homeowners using fixed rate mortgages may not be affected to severely, although, with lower interest rates, there will be an increase in mortgage approvals, and may cause an expansion in the housing market. As there is a drop in interest rates, aggregate demand increases, and forces aggregate price levels to increase. Also, the long run aggregate supply will shift right, increasing the real GDP substantially. Although it would be beneficial to have expansionary monetary policy to get money circulating around the economy,

  • Ranking:
  • Word count: 456
  • Level: AS and A Level
  • Subject: Economics
Access this essay

Discuss the economic consequences of unemployment

Discuss the economic consequences of unemployment? In this essay the economic benefits and consequences of unemployment will be discussed. Unemployment can be defined as the percentage of the working age group willing and able to find employment but without work. It can be separated into five categories; cyclical deficient, classical, structural, frictional and seasonal unemployment. There are two methods for measuring unemployment. Firstly, the claimant count measure adds up all those claiming unemployment benefits. It is cheap and easy to collect however; it is not very accurate and exaggerates the unemployed figure as many claimants are untruthful thus exaggerating the unemployment rate. In contrast the International Labour Organisation measure is more expensive but also more accurate. The main advantage of the ILO is that it can be compared with other countries directly. Firstly, unemployment will lead to an economy producing under the PPC showing inefficiency and a waste of resources which will do little good to the basic economic problem of unlimited demand and limited resources. However, unemployment improves labour mobility as there is a greater pool of workers who are keen to gain the necessary skills needed for employment. This benefits the economy as firms have a greater variety of workers to choose from. This increases efficiency as the best skilled workers

  • Ranking:
  • Word count: 835
  • Level: AS and A Level
  • Subject: Economics
Access this essay