The UK government uses both fiscal and monetary policy in its control of the economy. Discuss and analyse this statement.
4. Fiscal Policy
5. Monetary Policy
6. Working of the monetary Policy
8. Conclusion/ Recommendations
The Government has taken significant steps to strengthen the framework for fiscal policy since taking office in year 1997. Fiscal policy is directed firmly towards maintaining sound public finances over the medium term, and it also supports monetary policy over the economic cycle. The fiscal policy with the new monetary policy framework provides stability necessary for achieving the Government's central economic goal of high and sustainable levels of growth and employment. (Gregory Mankiw, 2007).
Monetary stability means stable prices - low inflation - and confidence in the currency. Government's inflation target defines the Stable prices, which the Bank of England seeks to meet through the decisions on interest rates taken by the Monetary Policy Committee. (www.bankofengland.com) [Accessed on 13/11/2008]
Gordon Brown, as a chancellor in the Tony Blair Government, specified golden rule of fiscal policy. The golden rule tries to ensure fairness between generations and also contributes to a prudent approach to the public finances. Current spending and revenue are the most significant drivers of trends in public sector net borrowing. Hence, achieving the golden rule plays a major part in keeping borrowing to levels consistent with a prudent and sustainable net debt ratio. The golden rule and the sustainable investment rule work together in managing the UK economy. ( http://www.hm-treasury.gov.uk) [Accessed on 27/11/2008]
Fiscal policy refers to government attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances). “When the government changes its spending and/or taxing to control unemployment or demand-pull inflation, it is putting fiscal policy into play” (Welch and Welch, 2007). The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the on the following variables in the economy:
• Aggregate demand and the level of economic activity; • The pattern of resource allocation;
• The distribution of income.
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. “When the government acts to deliberately change excess reserves and the interest rate( and thus, the money supply) to influence the levels of output, employment and/or prices in the economy, it is engaging in monetary policy” (Welch and Welch ,2007)
An economy is the realized social system of production, exchange, distribution, and consumption of goods and services of a country or other area. In order to judge the state of an economy, it is natural to look at the total income that everyone in the economy is earning. This is the task of Gross domestic product. GDP is defined as the total market value of all goods and services produced in the country in a certain year. It is defined in USD. (www.hm-treasury.gov.uk) [Accessed on 17/11/2008]
Qualitative research helps the subject being studied to give much ‘richer’ answers to questions put to them by the researcher, and may give valuable insights whereas Quantitative research is only concerned with counting and measuring things. Therefore a...
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