Professional Documents
Culture Documents
uk
Macroeconomic Policies
http://www.bized.co.uk
Macroeconomic Policies
http://www.bized.co.uk
Monetary Policy
http://www.bized.co.uk
Monetary Policy
Attempts to influence the level of economic activity (the amount of buying and selling in the economy) through changes to the amount of money in circulation and the price of money short-term interest rates. Interest rates the key area of Monetary Policy
http://www.bized.co.uk
Monetary Policy
Short-term interest rates set by the Monetary Policy Committee (MPC) of the Bank of England Meets for 2 days each month to decide on rates The official rate is the rate at which the Bank of England will lend to the financial system and influences the structure of all other interest rates
Copyright 2007 Biz/ed
http://www.bized.co.uk
Monetary Policy
http://www.bized.co.uk
Monetary Policy
Basis of Monetary Policy is that there is a long run relationship between the amount of money and inflation Demand for Money the amount people wish to hold as cash as opposed to other assets The Supply of Money the amount of money in circulation in the economy
http://www.bized.co.uk
Monetary Policy
The Classical Quantity Theory of Money: MV = PY
(where M = the money stock, V = velocity of circulation, P = price level and Y = level of national income
More formally:
http://www.bized.co.uk
Monetary Policy
P is the price level Y is the level of real national income Md is demand for money for transactions purposes K = proportion of national income held as transactions balances
Md = k PY where:
In equilibrium Md = Ms
http://www.bized.co.uk
Monetary Policy
Supply of Money:
Narrow Money notes and coins in circulation (M0) Broad Money Notes and coins plus money held in bank and building society accounts (M4)
A rise in either (ceteris paribus) might signal a rise in aggregate demand (AD)
Copyright 2007 Biz/ed
http://www.bized.co.uk
Monetary Policy
The Interest Rate Transmission Mechanism
The process by which a change in interest rates feeds through to AD
http://www.bized.co.uk
Investment
Margins
Costs
Employment
Consumption
http://www.bized.co.uk
Consumption
Interest Rates
Mortgages New
Investment
Savings
http://www.bized.co.uk
Dm
Xp
Interest Rates Exchange Rates
Dx
Balance of Payments
Mp
Depreciation
Dm
Xp
Dx
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
Inflation
2.3% 2.0% AD
Yf
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
Fiscal Policy
http://www.bized.co.uk
Fiscal Policy
Influencing the level of economic activity though manipulation of government income and expenditure Associated with Keynesian Demand Management Policies Now seen in wider terms:
Copyright 2007 Biz/ed
http://www.bized.co.uk
Fiscal Policy
Influence Aggregate Demand
Tax regime influences consumption (C) and investment (I) Government Spending (G)
http://www.bized.co.uk
Fiscal Policy
Also used to influence noneconomic objectives and provide framework for supply side policy e.g. education and health, poverty reduction, welfare reform, investment, regional policies, promotion of enterprise, etc.
http://www.bized.co.uk
Government Income
Tax Revenue Sale of Government Services e.g. prescriptions, passports, etc. Borrowing (PSNCR)
http://www.bized.co.uk
41 40 39 38 37
300
36
200 100 0
35 34 33
19 90 19 91 91 19 92 92 19 93 93 -9 19 4 94 19 95 95 19 96 96 19 97 97 19 98 98 19 99 99 20 00 00 20 01 01 20 02 02 20 -03 03 -0 20 43 04 20 053 05 20 063 06 20 073 07 20 083 08 -0 93
Public sector total receipts1 billion Public sector total receipts1 % GDP
Year
Source: http://www.hm-treasury.gov.uk/media//E3CCB/PublicFinancesDatabank280104.XLS
%GDP
bn
http://www.bized.co.uk
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
http://www.bized.co.uk
2.7
1.5 0.8 1.2 0.3 0.0 0.0 2.1 94.0
3.0
1.5 0.9 1.4 0.4 0.0 0.0 2.0 97.3
3.0
1.5 1.0 1.7 0.5 0.0 0.0 2.1 102.2
3.1
1.4 0.8 1.9 0.5 0.6 0.0 2.0 104.9
3.1
1.3 0.8 2.1 0.5 0.8 0.2 1.9 108.7
3.2
1.3 0.8 2.3 0.6 0.8 0.3 1.9 115.7
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
http://www.bized.co.uk
5.0
18.2 -5.3 334.5
4.3
18.1 -0.7 357.2
6.0
18.8 -3.8 380.4
4.7
19.9 -5.7 387.9
4.5
19.0 -5.2 393.2
4.4
19.4 -1.8 418.7
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
http://www.bized.co.uk
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
http://www.bized.co.uk
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
http://www.bized.co.uk
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
http://www.bized.co.uk
Fiscal Policy
Need to remember subtleties in use of fiscal policy Adjustment of income tax allowances rather than rates of income tax Extending or amending range of goods covered by VAT Changing the rules under which tax has to be paid married persons allowances, inheritance taxes, stamp duties, etc. Abolishment of certain tax allowances MIRAS (Mortgage Income Relief At Source) Accusations of stealth taxes much of it is a tinkering with the tax system to achieve certain aims mostly noneconomic (governments these days, for example, rarely increase taxes to dampen down the economy) Be aware of these subtleties when you are writing!
http://www.bized.co.uk
Government Expenditure
Social Security Law and Order Emergency Services Health Education Defence Foreign Aid Environment Agriculture Industry Transport Regions Culture, Media and Sport
http://www.bized.co.uk
Public Spending
500.0 450.0 400.0 350.0 300.0 (bn) 250.0 200.0 150.0 100.0 50.0 0.0
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
Year
Source: http://www.hm-treasury.gov.uk
http://www.bized.co.uk
23
bn
13
-7
-17 1991- 1992- 1993- 199492 93 94 95 1995- 1996- 1997- 1998- 1999- 200096 97 98 99 00 01 2001- 200202 03
Source:http://www.hm-treasury.gov.uk/media//E3CCB/PublicFinancesDatabank280104.XLS
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
http://www.bized.co.uk
the rules work together to promote capital investment while ensuring sustainable public finances in the long term. The golden rule requires the current budget to be in balance or surplus over the cycle, allowing the Government to borrow only to fund capital spending. The sustainable investment rule ensures that borrowing is maintained at a prudent level. To meet the sustainable investment rule with confidence, net debt will be maintained below 40 per cent of GDP in each and every year of the current economic cycle.
Source of information about the Golden Rule: http://www.hm-treasury.gov.uk/budget/bud_bud03/budget_report/bud_bud03_repchap2.cfm Crown Copyright, reproduced under licence
http://www.bized.co.uk
AS
TheAD=C+I+G+(X-M) If rise Assume government in AD an leads to AD therefore an increase reduces initial in taxes real Apart from G, C national (remember equilibrium income, the shifts to also the and I are ceteris subtleties) position paribuswith ,and a likelyto to be right AD1 unemployment orlevel increases of would affected directly or fall to spending, National 3% but at it will a cost indirectly by the of higher have Income inflation various giving policy change. effects: an unemployment rate of 5% (U = 5%) AD 1
2.5% 2.0%
AD
U=5% U=3%
Real National Income
http://www.bized.co.uk