Monetary and Fiscal Policies in UK

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To start with, I will explain what fiscal and monetarty policies are. Fiscal policy is the governmental use of increasing or decreasing in government spendings and/or taxation to influence the country’s economy in the way it was expected. It can be expansionary - used when economy is in recession and it is supposed to increase the AD and therefore GDP by increasing government spending and/or decreasing tax. It can also be contractionary - used when economy is beyond the level of full employment and it is supposed to decrease the AD and therefore the inflation rate by increasing tax and/or decreasing government spending. (Dodge, 2011) Monetary policy is the central bank’s use of increasing or decreasing the money supply or the base rate of interest to influence the level AD. It can be expansionary - used to take the economy out of recession by increasing the money supply and the interest rates and therefore increasing the AD. It can also be contractionary - used when country is above the level of full employment to decrease the AD by an increase in the interest rate and money supply. Whether it is fiscal or monetary policy, they are both aimed to achieve the four macro economic objectives, which are: low unemployment, price stability, high but sustainable economic growth, good balance of payments. Let’s look at the application of these policies in the real life by the government and central bank. In 2007-2008 there was Global Financial Crisis which started in the USA because of the ‘housing bubble’ appeared because banks started giving low interest rates subprime mortgages (for people who may have some difficulties with paying their debts: low income groups, unemployed, people with bad credit history an... ... middle of paper ... ...cutting of the central bank's interest rate was a very smart and helpful monetary policy contributed to the recovery of the economy a lot. Works Cited 1. Dodge, E. R. 2011. Expansionary and Contractionary Fiscal Policy Review for AP Economics. [online] Available at: http://www.education.com/study-help/article/expansionary-contractionary-fiscal-policy/ [Accessed: 27 Mar 2014]. 2. BBC News. 2008. BBC NEWS | UK | UK Politics | At-a-glance: Budget 2008. [online] Available at: http://news.bbc.co.uk/1/hi/7291841.stm [Accessed: 28 Mar 2014]. 3. The World Bank. n.d. Unemployment, female (% of female labor force). [online] Available at: http://data.worldbank.org/indicator/SL.UEM.TOTL.FE.ZS [Accessed: 29 Mar 2014]. 4. BBC News. 2009. UK interest rates lowered to 0.5%. [online] Available at: http://news.bbc.co.uk/1/hi/business/7925620.stm [Accessed: 30 Mar 2014].

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