Tighter Monetary/Fiscal Policy

Topics: Inflation, Tax, Macroeconomics Pages: 3 (950 words) Published: February 14, 2013
Evaluate the effects of ‘tighter monetary and fiscal policy’ on any two-macreconomic objectives

Monetary Policy involves changes in the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. Fiscal policy involves the use of government spending taxation and borrowing to influence the pattern of economic growth and to affect the level of aggregate demand, real output and employment. The four major objectives are full employment, price stability, a high but sustainable rate of economic growth, and keeping the Balance of Payments in equilibrium. In figure 1, it shows us The Bank of England base rate of interest from 2000-2001. Interest rates started at just over 5% in 2000 and reached a high of 6% in mid 2001. Interest rates gradually decreased over the years and reached 3.5% in mid 2003. Interest rates then picked up again, and reached 5.5% in 2008. Figure 3 shows us the strength of the pound against the dollar. The conversion rate started at 1.4 in 200 and increased to 1.8 in mid 2003. After a dip in 2005, the exchange rate reached 2 in 2007. If there is tighter monetary policy, this means there will be an increase in interest rates. If there is an increase in interest rates then there will be higher repayments on mortgages. There will be lower discretionary income to those with variable rate mortgages so people might decide to consume less. If consumption decreases this means aggregate demand (total expenditure of all goods or services in an economy) will also decrease because consumption is a component of AD. The AD curve will be pushed inwards from AD2 to AD1. As a result, this decreases the price level and real output. If there is a decrease in the price level this will cause a decrease in inflation. If there is an increase in decrease output there will not be economic growth and there will be less jobs available so unemployment will increase. These are two of the four macroeconomic...
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