Lecture 9- Government macroeconomic policies

Fiscal policy of government refers to its [blank_start]spending[blank_end] plans & its [blank_start]taxation[blank_end] & [blank_start]benefits[blank_end] system. UK government’s fiscal policy is administered by [blank_start]Treasury[blank_end], which is led by [blank_start]chancellor of exchequer[blank_end]

Budget sets out [blank_start]expenditure[blank_end] plan of government & ways in which it expects to [blank_start]raise[blank_end] money. In budget statement government will announce new [blank_start]policies[blank_end]

Budget deficit- When [blank_start]government spending[blank_end] is greater than [blank_start]revenue[blank_end] each month/year

National debt- Total amount [blank_start]owed[blank_end] by government

Every time government has budget deficit it [blank_start]adds[blank_end] to total debt

Government raises funds from [blank_start]taxes[blank_end]. One form of tax in UK is [blank_start]direct taxes[blank_end] (taxes placed directly on [blank_start]earnings[blank_end]) & another form is [blank_start]indirect taxes[blank_end] (taxes paid when [blank_start]household[blank_end] or [blank_start]business[blank_end] buys product)

One purpose for use of taxation by government is to [blank_start]raise revenue[blank_end] to finance its [blank_start]spending[blank_end]

Another purpose for use of taxation by government is to change [blank_start]consumers[blank_end]’ & [blank_start]firms[blank_end]’ behaviour, e.g. to make some products (such as cigarettes) more [blank_start]expensive[blank_end] & less [blank_start]desirable[blank_end]

Third purpose for use of taxation by government is to make [blank_start]foreign products[blank_end] less competitive. If you are [blank_start]importing[blank_end] goods from overseas, then you may have to pay [blank_start]tariff[blank_end] to government which is an attempt to help [blank_start]domestic[blank_end] businesses

Final purpose for use of taxation by government is to [blank_start]redistribute[blank_end] income. This may be done so there is more [blank_start]equity[blank_end] (use [blank_start]higher[blank_end] rate tax to [blank_start]redistribute[blank_end] income to people who are earning [blank_start]less[blank_end])

Government spending takes many forms. One form is [blank_start]local[blank_end] government spending by [blank_start]councils[blank_end] e.g. on [blank_start]local[blank_end] services & facilities. Another form is [blank_start]central[blank_end] government spending e.g. on [blank_start]defence[blank_end] & [blank_start]NHS[blank_end]

Public sector spending can also be analysed in terms of how much goes on [blank_start]operating[blank_end] (day-to-day) [blank_start]expenditure[blank_end] & how much goes on [blank_start]capital expenditure[blank_end] (which is [blank_start]investment[blank_end] for future)

Multiplier measures how much [blank_start]national income[blank_end] increases relative to an initial change in [blank_start]demand[blank_end], e.g. caused by change in [blank_start]government spending[blank_end]. How much [blank_start]national income[blank_end] increases depends on [blank_start]marginal propensity to consume[blank_end] (measures extra [blank_start]spending[blank_end] on consumption out of each extra [blank_start]pound[blank_end])

Monetary policy- Uses control of [blank_start]money supply[blank_end] & [blank_start]interest rates[blank_end] to influence economy. Bank of England is set an inflation target by [blank_start]government[blank_end]. Bank of England will then [blank_start]intervene[blank_end] in economy to achieve this [blank_start]objective[blank_end]. Its main tool is [blank_start]interest rate[blank_end]

Quantitative easing occurs when [blank_start]central bank[blank_end] such as Bank of England creates new money [blank_start]electronically[blank_end] & uses this to make [blank_start]large[blank_end] purchases of assets. These purchases are made from [blank_start]private[blank_end] sector i.e. from pension [blank_start]funds[blank_end], high-street [blank_start]banks[blank_end] & non-financial [blank_start]firms[blank_end]. Most of these assets are [blank_start]government bonds[blank_end] (also known as gilts). Government bonds are IOUs sold by [blank_start]government[blank_end] to raise money. This pushes up [blank_start]price[blank_end] of assets, lowering [blank_start]yields[blank_end] (return) on them. This [blank_start]encourages[blank_end] those selling these assets to use money they received from [blank_start]sale[blank_end] to buy assets with [blank_start]higher[blank_end] yield instead, such as company [blank_start]shares[blank_end] & [blank_start]bonds[blank_end]

Exchange rate- [blank_start]Price[blank_end] of one [blank_start]currency[blank_end] in terms of [blank_start]another[blank_end]

Exchange rate policy- Exchange rate of country can change with changes in [blank_start]supply[blank_end] & [blank_start]demand[blank_end] conditions in foreign currency [blank_start]markets[blank_end]. This changes prices of UK products [blank_start]overseas[blank_end] & price of foreign products in pounds. [blank_start]Government[blank_end] may intervene in currency markets to influence [blank_start]price[blank_end] of currency. It may do this to [blank_start]stabilise[blank_end] price. This will help businesses with their [blank_start]planning[blank_end]. It may intervene to affect [blank_start]competitiveness[blank_end] of exports or [blank_start]price[blank_end] of imports (& therefore costs & inflationary pressures)

Exchange rate may be affected by various factors. They are changes in [blank_start]interest rate[blank_end] by Bank of England & [blank_start]buying & selling[blank_end] currency

Supply side policies- Government policies aimed at making [blank_start]markets[blank_end] work more [blank_start]effectively[blank_end] to increase [blank_start]quantity[blank_end] & [blank_start]quality[blank_end] of resources available in economy. They are aimed at increasing [blank_start]aggregate supply[blank_end] on an economy

One way government may intervene using supply side policy is through intervening in [blank_start]financial markets[blank_end] to make funds more easily available for [blank_start]businesses[blank_end] to fund [blank_start]investment[blank_end]

Another way government may intervene using supply side policy is through developing [blank_start]infrastructure[blank_end] of economy to help [blank_start]business[blank_end] to compete more [blank_start]effectively[blank_end]

Third way government may intervene using supply side policy is through ensuring that [blank_start]markets[blank_end] work [blank_start]fairly[blank_end] & [blank_start]competitively[blank_end]

Fourth way government may intervene using supply side policy is through helping [blank_start]businesses[blank_end] to be more [blank_start]innovative[blank_end]

Fifth way government may intervene using supply side policy is through intervening to make [blank_start]labour market[blank_end] work better

Sixth way government may intervene using supply side policy is through helping [blank_start]businesses[blank_end] to start up & do [blank_start]business[blank_end] by reducing [blank_start]administrative[blank_end] procedures necessary to do so