100315 policies busec

###Macroeconomic Policies - PowerPoint Presentation - Full version###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
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
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
of Money:
MV = PY
(where M = the money stock, V = velocity of circulation, P = price level and Y = level of national income
More formally:
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
In equilibrium Md = Ms
So: P = 1/kY x M
A rise in Ms will lead to a proportional rise in P
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)
The Interest Rate Transmission Mechanism
The process by which a change in interest rates feeds through to AD
Interest Rates
Interest Rates
Interest Rates
Exchange Rates
Copyright 2007 – Biz/ed
Supply Side Policy
Intention is to shift the aggregate supply curve to the right, increasing
the long term productive capacity
of the economy
Tend to be long-term policies
Arguments about how effective they are – e.g. lowering taxes increases incentives, reducing welfare dependency increases the urge
to find work
AS
Yf
AS1
Yf2
AD
2.3%
2.0%
Supply side policies can help to push the AS curve to the right increasing the capacity of the economy from Yf to Yf2
Increases in long-term capacity can help the economy to grow without undue pressure on inflation.
of the economy
Key feature – open up markets and de-regulate to improve efficiency in the working of markets and the allocation
of resources
Main areas of policy:
Labour Market – reduce impediments to free market, reduce bureaucracy and ‘red tape’ –
flexible labour markets
of the eighties still has an impact in this respect
Short term contracts
Flexible working arrangements
Hiring and firing
Contracts, terms and conditions, pay
Criticism of such policies is that they put the needs of employers above those of workers which can lead to exploitation
to work
Modern Apprenticeships
Expansion of vocational qualifications
Expansion of university access
and entrepreneurial spirit
Regional policies to encourage enterprise, investment, location, expansion
of government income and expenditure
Associated with Keynesian Demand Management Policies
Now seen in wider terms:
Government Spending (G)
BUT:
Fiscal Policy
Also used to influence non-economic objectives and provide framework for supply side policy
e.g. education and health, poverty reduction, welfare reform, investment, regional policies, promotion of enterprise, etc.
Borrowing (PSNCR)
Year
£bn
%GDP
219.418
38.922188617
229.398
38.5507869874
225.395
36.6255337957
233.653
35.7496075473
254.842
36.9028707961
275.716
37.8009539491
288.2
37.2284082982
316.123
38.383120912
336.241
38.6806246585
358.809
39.0138698005
382.449
39.6933912329
389.955
38.7979022837
396.151
37.5833087459
422.8
38.1
456.2
38.9
489.2
39.5
519.8
39.9
550.3
40.2
580.1
40.4
Sheet1
C1: TOTAL RECEIPTS AND NET TAXES AND SOCIAL SECURITY CONTRIBUTIONS (£ billion and % GDP)
Year
Year
£bn
%GDP
Sheet2
Sheet3
88.4
95.7
106.1
110.3
112.6
118.3
316.6
335.4
359.3
369.1
374.9
196.7
18.2
18.1
18.8
19.9
19.0
19.4
-5.3
-0.7
-3.8
-5.7
-5.2
-1.8
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
Source: http://www.hm-treasury.gov.uk/media/F6C/7E/public_fin_databank_211204.xls
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 non-economic (governments these days, for example, rarely ‘increase taxes’ to dampen down the economy)
Be aware of these subtleties when you are writing!
Source:http://www.hm-treasury.gov.uk/media//E3CCB/PublicFinancesDatabank280104.XLS
Chart1
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The Golden Rule!
Fiscal policy framework
The Government's fiscal policy framework is based on the five key principles set out in the Code for fiscal stability - transparency, stability, responsibility, fairness and efficiency.
The Code requires the Government to state both its objectives and the rules through which fiscal policy will be operated. The Government's fiscal policy objectives are:
The Golden Rule!
over the medium term, to ensure sound public finances and that spending and taxation impact fairly within and between generations; and
over the short term, to support monetary policy and, in particular, to allow the automatic stabilisers to help smooth the path of the economy.
The Golden Rule!
These objectives are implemented through two fiscal rules, against which the performance of fiscal policy can be judged. The fiscal rules are:
the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and
the sustainable investment rule: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level. Other things being equal, net debt will be maintained below 40 per cent of GDP over the economic cycle.
The Golden Rule!
The fiscal rules ensure sound public finances in the medium term while allowing flexibility in two key respects:
the rules are set over the economic cycle. This allows the fiscal balances to vary between years in line with the cyclical position of the economy, permitting the automatic stabilisers to operate freely to help smooth the path of the economy in the face of variations in demand; and
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
U=5%
Assume an initial equilibrium position with a level of National Income giving an unemployment rate of 5% (U = 5%)
If government ‘reduces taxes’ (remember the subtleties) and or increases spending, it will have various effects:
AD=C+I+G+(X-M)
Apart from G, C and I are also likely to be affected directly or indirectly by the policy change.
AD 1
2.5%
U=3%
The rise in AD leads to an increase in real national income, ceteris paribus, unemployment would fall to 3% but at a cost of higher inflation
Fiscal Policy In Action
Fiscal Policy influences AD in the short term but can be used to affect AS in the long run – depending on the nature of the policy.
Try your hand at Fiscal Policy by going to the Virtual Economy
(http://www.bized.ac.uk/virtual/economy/policy/advisors/fiscal.htm)
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100315 policies busec

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