The aim of monetary policy The main aim

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The aim of monetary policy The main aim of monetary policy is to help

The aim of monetary policy The main aim of monetary policy is to help keep macroeconomic stability in the economy and also to maintain the value of money – i. e. achieve price stability

The instruments of monetary policy • Monetary policy involves the use of interest rates

The instruments of monetary policy • Monetary policy involves the use of interest rates and other instruments of policy to control – The growth of aggregate demand (C+I+G+X-M) relative to the economy’s productive potential – The demand for and supply of money and credit – To occasionally influence the value of the exchange rate New ‘in’ term … Quantitative easing!

Monetary Policy Committee • Main objective for the Bank of England: – Meet the

Monetary Policy Committee • Main objective for the Bank of England: – Meet the inflation target: Inflation of 2. 0% – Monetary policy is designed to be pre-emptive (forward-looking) I. e. raise interest rates before inflation accelerates, or cut interest rates to avoid an inflation under-shoot / economic recession • Changes in official interest rates filter their way through the rest of the UK financial system (e. g. savings rates and mortgage rates.

Quick review: Monetary and Fiscal Policy • Monetary Policy • The main instruments of

Quick review: Monetary and Fiscal Policy • Monetary Policy • The main instruments of monetary policy are • Fiscal Policy • The main instruments of fiscal policy are • (i) Interest rates • (ii) Changes in the exchange rate • (iii) Changes in the supply of credit • • (i) Government spending (ii) Direct taxation (iii) Indirect taxation (iv) Government borrowing

You decide – is it monetary or fiscal? • A cut in corporation tax

You decide – is it monetary or fiscal? • A cut in corporation tax Now decide will each of these policies • A restriction on bank lending REFLATE / EXPAND or • A reduction in the budget deficit DEFLATE / CONTRACT the economy? • An increase in govt subsidies • An increase in interest rates

The aim of Fiscal Policy Fiscal policy involves the use of government spending, taxation

The aim of Fiscal Policy Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. http: //tutor 2 u. net/blog/index. php/businessstudies/comments/fiscal-policy-where-doesthe-government-raise-finance/

Different types of tax • Progressive taxation — as income rises, a larger %

Different types of tax • Progressive taxation — as income rises, a larger % of income is paid in tax (eg UK income tax). • Regressive taxation — as income rises, a smaller % of income is paid in tax (eg VAT). • Proportional taxation — the same % of income is paid in tax, no matter what the level of income.

Regressive taxes • A tax that takes a larger percentage from low-income people than

Regressive taxes • A tax that takes a larger percentage from low-income people than from high-income people. • A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder. • For example, if a person has £ 10 of income and must pay £ 1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has £ 20 of income, this £ 1 tax only represents 5% of that person's income.

Progressive and regressive taxation • Progressive taxes – With a progressive tax, the marginal

Progressive and regressive taxation • Progressive taxes – With a progressive tax, the marginal rate of tax rises as income rises. – i. e. as people earn more income, the rate of tax on each extra pound earned goes up – This causes a rise in the average percentage rate of tax • Regressive taxes – With a regressive tax, the rate of tax falls as incomes rise – In the UK, most examples of regressive taxes come from duties on items of spending such as cigarettes and alcohol.