UK government’s economic strategy (eg economic growth, reducing unemployment, improving productivity) is formally stated in
The annual budget
Scottish government can
- Control how it spends allocated funding on areas under its’ control eg education/ health
- Vary income tax rate
Price stability is measured using
Consumer price index (CPI) - statistical estimate constructed using sample of representative items whose prices are collected periodically. Target is currently 2%
When prices are stable
The value of money is being maintained
If the value of money is falling and uncertain
Inflation is present - can fundamentally interfere with the functioning of a market economy > price changes are harder to interpret
Economic problems created by price instability (3)
- Industrial relations conflict
- Redistribution of income and wealth (loss of purchasing power)
- International competitiveness
Types of economic policy (2)
- Fiscal policy
- Monetary policy
Monetary policy
Concerned with the supply of money and terms + availability of credit
Monetary policy aim
To achieve price stability by influencing the level of demand in the economy so it grows in line with economy’s ability to produce goods and services
Increase in interest rates impact
- Cost of existing floating rate loans will increase
- Interest rate return on deposits is higher, therefore expected return on investments will increase, investment will fall
- If a bus sells goods which usually require financing, becomes more expensive for the consumer - demand for goods may fall.
Used to slow down the demand for goods and services and control inflation
Decrease in interest rates impact (2)
- Cost of borrowing will reduce, making loans and credit cards less expensive. Encourages people to spend more.
- Magnification as asset prices rise giving consumers greater feeling of wealth and ability to spend
Used to stimulate the demand for goods and services
Who has power to change interest rate?
Bank of England
Main instrument for control of interest rates
Bank rate = rate the BoE will lend to other banks
Bank rate controlled by
Monetary Policy Committee (MPC) > 9 members (Governor, 3 deputy governors, Chief Economist and four experts appointed by the Chancellor). Minutes are publicised and closely analysed.
Bank of England functions
- Government’s banker (arranged borrowing and repayment of gov debt)
- Maintaining financial stability - quantitative easing/ lender of last resort (HBOS)
- Maintaining foreign currency reserves - used to trade on forex markets to stabilise exchange rate
- International regulation of the banking sector > Bank for International Settlements set eg min capital requirements for commercial banks
Fiscal policy
Government’s policy on spending and taxation
If government’s overall spending exceeds tax revenues
Referred to as budget/ fiscal deficit
Running large deficit over number of years can lead to (3)
- High national debt
- Higher risk associated with government bonds
- Higher interest rates
Improving productivity (6)
- Creating world class digital infrastructure (4G/ free wifi)
- Improving digital skills (eg coding)
- Encouraging enterprise and innovation (apprenticeships)
- Creating right conditions for investment (corporation tax reduced)
- Reducing administration and compliance costs
- Promoting competition (Competition Act 1998)
Kyoto Protocol (5)
- Legally binding Feb 2005
- 37 nations committed to make 5.2% gas emission cuts
- US refused
- Amended - now runs to 31/12/20
- Parties must reduce emissions by 18% from 1990 levels
UK government measures to meet Kyoto target (3)
- Climate change levy (tax on energy use by businesses)
- Landfill tax (tax on disposal of waste)
- Emissions trading (tradeable permits)
UK gov policy on exchange rates
Allowed to be determined mainly by market forces, therefore the value of the £ has been volatile
Exchange rate determined by
Forces of supply and demand
Factors that will increase exchange rate (4)
- Higher interest rates
- Higher economic growth
- Expectations of future increase
- Lower inflation - increasing competitiveness of exports
