ECN105: Principles of Economics
7th March 2011
In this essay, I will be mainly looking at the performance of the UK economy during the recession, and giving analysis to the figures. Subsequently, focusing on more details of how the government of the UK has used its policies to address these problems. Furthermore, some relevant diagrams will also be sketched in order to help to analyse how policies work.
UK in recession
(Source: Trading Economics 2011)
As you can see, during 2008 and 2010, was an extremely difficult time for Britain, unemployment rate was 7.9% in 2009, the current account was negative 11% and especially in the second half of 2009, its GDP growth rate went negative to 2.4%, which was a steepest fall since 1980. Mean while, lots of companies went bankruptcy.
Policies by the UK government
Effort to stop the recession went even deeper were being widely spread. In the first quarter of 2009, bank of England has cut interest rate to 1.5%(BBC News 2009), which was aiming for discouraging people’s saving and promoting spending. Government expenditure on welfare was also increased from 48.3 billion pounds to 52.9 billion pounds to help people on finding jobs and huge amount of money of bailout on preventing banks to go bankruptcy, in order to promote lending. (Public Spending Details for 2009, 2011) At the same time, VAT, known as value added in tax, was also being cut to stimulate people’s incentives of purchasing goods and services.
To explain the theory that reduction in consumption will lead to fall in real GDP, it will be best to use the Keynesian 45 degree line to explain:
This exhibit illustrates the basic Keynesian cross diagram. The vertical axis measures aggregate expenditures. The horizontal axis measures aggregate Real GDP.... [continues]
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