Monetary and Fiscal Policies

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Assignment 2: Monetary and Fiscal Policies P3: Outline how both fiscal and monetary policy decisions have affected a selected business. M2: Analyse the effects of fiscal and monetary policies for a selected business in terms of the market in which it operates Tesco like every business will be affected by Monetary and Fiscal policies, whether this be directly or indirectly. Tesco PLC will be affected more indirectly by these policies and in this report I will explain how. Fiscal Policy involves the Government changing the levels of Taxation and Government Spending in order to influence AD (Aggregate Demand) and therefore the level of economic activity. Monetary Policy involves using interest rates or changes to money supply to influence the levels of consumer spending and Aggregate Demand. The objectives of the government are: 1. low inflation CPI = 2% 2. Strong economic growth. 3. To Reduce unemployment 4. To avoid large deficit on current account balance of payments Fiscal Policy The Fiscal Policy may be Expansionary or Deflationary. Currently the policy is expansionary. This involves increasing AD, therefore the government will increase spending and cut taxes. Lower taxes will increase consumers spending because they have more disposable income. This will worsen the govt budget deficit. The other method is Deflationary fiscal policy this involves decreasing AD therefore the government will cut their spending and or increase taxes. Higher taxes will reduce consumer spending. This will lead to an improvement in the government’s budget deficit. Tesco will be affected by direct and indirect taxation which in turn has impacts on business costs, on aggregate demand, and therefore on business revenues. Direct taxat... ... middle of paper ... ...cial banks and the consumer to decide how to go forward. The Bank of England firstly pumps money into all the commercial banks this is done by them buying assets such as bad loans from them. This is done so in turn the commercial banks will lend more money to the consumers. As a consumer we must then spend this money increasing demand and therefore overall sales. If sales are up then profits too will be higher. This is a positive thing for Tesco has a larger demand for their products allow them to grow and expand due to greater profits. When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.

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