ILO:
a) Distinction between monetary and fiscal policy
b) Monetary policy instruments:
o interest rates
o asset purchases to increase the money supply (quantitative easing)
c) Fiscal policy instruments:
o government spending and taxation
d) Distinction between government budget (fiscal) deficit and surplus
e) Distinction between, and examples of, direct and indirect taxation
f) Use of AD/AS diagrams to illustrate demand-side policies
g) The role of the Bank of England:
o the role and operation of the Bank of England's Monetary Policy Committee
h) Awareness of demand-side policies in the Great Depression and the Global Financial Crisis of 2008
o different interpretations
o policy responses in the US and UK
i) Strengths and weaknesses of demand-side policies
a) Distinction between monetary and fiscal policy
b) Monetary policy instruments:
o interest rates
o asset purchases to increase the money supply (quantitative easing)
c) Fiscal policy instruments:
o government spending and taxation
d) Distinction between government budget (fiscal) deficit and surplus
e) Distinction between, and examples of, direct and indirect taxation
f) Use of AD/AS diagrams to illustrate demand-side policies
g) The role of the Bank of England:
o the role and operation of the Bank of England's Monetary Policy Committee
h) Awareness of demand-side policies in the Great Depression and the Global Financial Crisis of 2008
o different interpretations
o policy responses in the US and UK
i) Strengths and weaknesses of demand-side policies
Distinction between Monetary & Fiscal policy
> Monetary policy involves using interest rates and the money supply to affect AD.
> Fiscal policy involves government spending and taxation to affect AD. . > In the UK, monetary policy is currently conducted by the Bank of England. > Fiscal policy is conducted by the Government. |
Business and Fiscal and Monetary Policy
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2008 Financial Crisis
Explain the cause of the 2008/9 recession in the UK. (5 marks)
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Northern Rock Panic
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Alex Brummer: Northern Rock ten years on - BBC Newsnight
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Interest rates
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Examine 2 ways lower interest rates effect AD.
(8 marks)
UK interest rates cut to 0.25%
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Explain how negative interest rates could support economic growth. (5 marks)
How do negative interest rates work? | CNBC Explains
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Related articles:
Interest rates explained - interactive video Business basics: Why do interest rates matter?
The absurdity of controlling inflation by adjusting interest rates Interest rates: What will the rise mean for you?
Interest rates explained - interactive video Business basics: Why do interest rates matter?
The absurdity of controlling inflation by adjusting interest rates Interest rates: What will the rise mean for you?
Money Supply
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Assess the effectiveness of quantitative easing to support the UK economy. (12 marks)
Bank Of England announces huge new money laundering / QE scam 'for UK economy' (18June20)
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Explain the importance of the lender of the last resort for banks in preventing a depression. (5 marks)
Milton Friedman on the Great Depression, Bank Runs & the Federal Reserve
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Related articles asset purchases to increase the money supply (quantitative easing)
The Economist explains: What is quantitative easing?
BBC explanation - slide show
Radio show - Shaking the magic money tree
The Economist explains: What is quantitative easing?
BBC explanation - slide show
Radio show - Shaking the magic money tree
Monetary policy revision
Review the following revision videos to consolidate your understanding of monetary policy.
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Y1 31) Monetary Policy - Interest Rates, Money Supply & Exchange Rate
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Y1 32) Expansionary Monetary Policy - Evaluation
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Fiscal policy
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Explain using an appropriate diagram how higher Government spending will impact the macro equilibrium. (5 marks)
How does the government spend your money?
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Assess the risk of expansionary fiscal policy in response to the Covid 19 economic crisis. (10 marks)
The Economist Essentials: Public Debt | The Economist
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Related article :
UK debt and deficit: All you need to know General election 2019: How much tax do British people pay? |
Fiscal policy revision
Review the following revision videos to consolidate your understanding of fiscal policy.
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Y1 29) Fiscal Policy - Government Spending and Taxation
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Fiscal Policy - Introduction to Fiscal Policy | Economics Revision
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Awareness of demand-side policies in the Great Depression
Students do not need to know about the likely causes of the Great Depression or the Global Financial Crisis of 2008.
Rather, these are two contexts in which students can apply their
knowledge of demand-side policies – an ability to analyse the likely effects of
the policies is more important than recall of the precise details of the policies.
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Demand-side policies in the Great Depression:
Fiscal policy In the US, Roosevelt's New Deal involved a huge fiscal stimulus package, as the US government increased its spending massively. The money was spent on building public infrastructure, and employing people in both conservation and construction. There is debate surrounding the extent to which the New Deal helped to end the Great Depression or whether it was really the huge government spending on fighting the Second World War that did so. |
The Great Depression - 5 Minute History Lesson
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In addition, the US government introduced protectionist policies like the
Smoot–Hawley Tariff Act in 1930
. (Knowledge of the details of the Act is not required.)
In the UK, focus was more on efforts to balance the government budget. In 1931, an Emergency Budget cut public sector wages and unemployment pay by 10% and raised income tax from 22.5% to 25%. These measures were deflationary and reduced purchasing power in the economy, worsening the situation. In 1932, the UK government introduced tariffs at a rate of 10% on all imports except those from the countries of the British Empire. |
The New Deal: Crash Course US History #34
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Monetary policy
Economists disagree as to the effect of monetary policy on the course of the Great Depression in the US. Some blame tight monetary policies for the start and the length of the Depression, while others disagree even that monetary policy was tight. In February 1930, the Federal Reserve cut the interest rate from 6% to 4%, although in late 1930 it raised it again to help to preserve the value of the dollar after substantial amounts of dollars were converted into gold, weakening the currency. Critics argue that these increases in the interest rate further restricted the availability of credit for businesses, causing more bankruptcies. |
Milton Friedman explains role of gold in Great Depression.
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The US government acted to increase the money supply from April to June 1930, but economists are divided over the effectiveness of this.
In the UK, in September 1931 the government was finally forced to abandon the gold standard. Immediately the exchange rate of the pound fell by 25%, which improved the international competitiveness of the UK. Following this, interest rates were also reduced from 6% to 2%, adding to the economic recovery.
In the UK, in September 1931 the government was finally forced to abandon the gold standard. Immediately the exchange rate of the pound fell by 25%, which improved the international competitiveness of the UK. Following this, interest rates were also reduced from 6% to 2%, adding to the economic recovery.
Awareness of demand-side policies in the Global Financial Crisis of 2008
Monetary Policy:
When the global financial crisis broke in 2008, interest rates were at 5%.
The Bank of England made its first cut just a few weeks after the bankruptcy of US bank Lehman Brothers. More cuts were made as the financial system came close to collapse and a global recession took hold. At the beginning of 2009 in the UK, unemployment was rising sharply, business and consumer confidence was severely depressed and banks were holding onto their funds.
The succession of cuts in the cost of borrowing had brought rates down to a historic low, but, with the economy still in recession, more still needed to be done to try to kick-start the recovery. So in March 2009, along with a last cut in rates to 0.5%, the Bank also introduced a programme of quantitative easing. It initially injected £75bn of new money into the economy, but this has since been expanded in steps up to the current level of £375bn.
When it made its most recent increase in July 2012, the Bank explained this was due to continued weakness in the UK's economic recovery, which it feared would lead to inflation falling below 2%, which it now has. While the economic recovery has actually strengthened significantly in recent months, the Bank remains concerned about the sustainability of the recovery and the implications this would have on inflation in the longer term. It is therefore reluctant to wind down quantitative easing or raise rates until it is more certain that the UK is on a secure path of economic growth.
http://www.bbc.co.uk/news/business-11013715
When the global financial crisis broke in 2008, interest rates were at 5%.
The Bank of England made its first cut just a few weeks after the bankruptcy of US bank Lehman Brothers. More cuts were made as the financial system came close to collapse and a global recession took hold. At the beginning of 2009 in the UK, unemployment was rising sharply, business and consumer confidence was severely depressed and banks were holding onto their funds.
The succession of cuts in the cost of borrowing had brought rates down to a historic low, but, with the economy still in recession, more still needed to be done to try to kick-start the recovery. So in March 2009, along with a last cut in rates to 0.5%, the Bank also introduced a programme of quantitative easing. It initially injected £75bn of new money into the economy, but this has since been expanded in steps up to the current level of £375bn.
When it made its most recent increase in July 2012, the Bank explained this was due to continued weakness in the UK's economic recovery, which it feared would lead to inflation falling below 2%, which it now has. While the economic recovery has actually strengthened significantly in recent months, the Bank remains concerned about the sustainability of the recovery and the implications this would have on inflation in the longer term. It is therefore reluctant to wind down quantitative easing or raise rates until it is more certain that the UK is on a secure path of economic growth.
http://www.bbc.co.uk/news/business-11013715
Fiscal Policy:
The United Kingdom has been one of the major economies leading calls for fiscal action to stimulate aggregate demand. Throughout 2008 a number of fiscal measures were introduced including a £145 tax cut for basic rate (below £34,800 pa earnings) tax payers, a temporary 2.5% cut in Value Added Tax (Sales Tax), £3 billion worth of investment spending brought forward from 2010 and a variety of other measures such as a £20 billion Small Enterprise Loan Guarantee Scheme. The total cost of these measures, mostly announced in the November 2008 Pre-Budget Report was roughly £20 billion (not counting loan guarantees). Further limited measures worth £5 billion were unveiled in the 2009 budget including training help for the young unemployed and a "car scrappage" scheme which offered £2,000 in subsidy for a new car purchase for the scrapping of a car more than 10 years old (similar to schemes in Germany and France).
The UK has been limited in its ability to take discretionary fiscal action by the significant burden that bank bail-outs have had on public finances. This has contributed to a significant rise in the deficit to an estimated £175 billion (12.4% of GDP) in 2009-10 and a rise in the national debt above 80% of GDP at its peak. Furthermore, the UK has significant automatic stabilisers which have contributed far more than discretionary action and more than most other countries. As a result, further discretionary fiscal action is unlikely.
http://en.wikipedia.org/wiki/National_fiscal_policy_response_to_the_Great_Recession#United_Kingdom
The United Kingdom has been one of the major economies leading calls for fiscal action to stimulate aggregate demand. Throughout 2008 a number of fiscal measures were introduced including a £145 tax cut for basic rate (below £34,800 pa earnings) tax payers, a temporary 2.5% cut in Value Added Tax (Sales Tax), £3 billion worth of investment spending brought forward from 2010 and a variety of other measures such as a £20 billion Small Enterprise Loan Guarantee Scheme. The total cost of these measures, mostly announced in the November 2008 Pre-Budget Report was roughly £20 billion (not counting loan guarantees). Further limited measures worth £5 billion were unveiled in the 2009 budget including training help for the young unemployed and a "car scrappage" scheme which offered £2,000 in subsidy for a new car purchase for the scrapping of a car more than 10 years old (similar to schemes in Germany and France).
The UK has been limited in its ability to take discretionary fiscal action by the significant burden that bank bail-outs have had on public finances. This has contributed to a significant rise in the deficit to an estimated £175 billion (12.4% of GDP) in 2009-10 and a rise in the national debt above 80% of GDP at its peak. Furthermore, the UK has significant automatic stabilisers which have contributed far more than discretionary action and more than most other countries. As a result, further discretionary fiscal action is unlikely.
http://en.wikipedia.org/wiki/National_fiscal_policy_response_to_the_Great_Recession#United_Kingdom
Impacts of demand side policy decisions
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How do you solve a problem like austerity?
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- General government net borrowing (‘deficit’) was £102.3 billion in the financial year 2013/14 (5.9% of GDP), a decrease of £23.5 billion compared with 2012/13.
- General government gross debt at the end of the financial year 2013/14 was £1,521.2 billion (87.8% of GDP), an increase of £100.6 billion compared to the end of 2012/13.
http://www.ons.gov.uk/ons/rel/psa/eu-government-debt-and-deficit-returns/september-2014/stb---september-2014.html
Masters of Money:
Friedrich Hayek
Example essay
Evaluate the use of monetary policy to achieve the UK’s macroeconomic objectives. (20 marks - 4K/4P/6A/6E)