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Impact of fiscal and monetary policy Essay

Fiscal policy

Government influence the economy by changing the level and types of taxes, the extent and composition of spending, and degree and form of borrowing. Lower taxes mean more disposable income for consumers and more cash for businesses to invest in jobs and equipment. Stimulus-spending programs, which are short-term in nature and often involve infrastructure projects, can also help drive business demand by creating short-term jobs. By creating short time jobs government bust demand for other business.

For example: If government is launching project to build a new bridge, it creates short time jobs for business who will be building this bridge, but also it need concrede and metal to build it. So it orders these materials from local business and increase their profitability. Local business to meet the new demand will need to employ more workers, this will increase overall disposable income in the economy and will help to grow other business too. If government is increasing income or consumption taxes usually mean less disposable income, which, over time, can decelerate business activity. It simply mean that people have less money to spend and so business has less customer less profit and less money to invest in creating new jobs.

Monetary Policy

Monetary policy is controlled by Bank OF England witch is founded in 1694, nationalized in 1946, the Bank of England is charged with providing monetary and financial stability for the United Kingdom. Monetarist economists believe that government spending and tax changes (fiscal policy) can only have a temporary effect on AD, output and jobs and that monetary policy is a more effective instrument for controlling AD and inflationary pressure. The real rate of interest is important to businesses and consumers when making spending and saving decisions. Low interest rates mean lower interest expense for businesses and higher disposable income for consumers.

This combination usually means higher business profits. Lower mortgage rates may spur more home-buying activity, which is usually good news for the construction industry. Construction industry is very important. It boost very many sectors in economy, probably because the variaty of materials needed for it. And many business would have increased demand on their products. Rate changes may also impact exchange rates — higher rates increase the value of the £ relative to other currencies, which lowers import costs and increases export costs for U.K. businesses. So products from abroad will cost less in UK, but it will reduce the export of UK products to other country’s because it price would be higher. Also lower rates means lower value of £ relative to other currencies so it creates higher import costs and lower export costs. Products from abroad in UK will cost more, while UK made products will cost less in other country’s.


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