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Using the Data and Your Knowledge of Recent Economic Events, Assess the Contribution That Fiscal and Monetary Policies Can Make in Maintaining a Stable Economy

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As stable economy is one which has low rates on inflation and unemployment and a steady rate of economic growth along with a current account stability. Fiscal policy involves the use of government spending and tax receipts to influence the level and pattern of economic activity, whilst monetary policy uses interest rates to achieve the same. Fiscal and monetary policy can be used to influence short term Aggregate Demand with the aim of promoting a steady rate of economic growth, low unemployment and low inflation. In a recession there will be a loosening of monetary policy when interest rates are cut and a budget deficit run with the aim of boosting Aggregate Demand throughout the economy. This is what is happening at the moment in the UK as the economy slowly comes of out recession. Interest rates are down to 0.5% and income tax rates are slowly being cut to act as an incentive to workers to work harder and boost productivity.

However, as we see in the UK economy these policies are having a very slow impact on growth. Consumer confidence and business confidence is very low and when this happens cuts in interest rates and taxes will not encourage household and consumers to spend more. They may be tempted to use the extra money to save more and pay off debt rather than spend and this could hinder economic recovery. Inflation in the UK economy was very low between 1992 and 2008 and this allowed interest rates to fall to a low level which helped boost economic growth and living standards in the economy. Now with inflation going up, the bank of England is considering raising interest rates to curb cost push inflation. However with the economy still weak and not out of recession raising interest rates is likely to have a negative impact upon the economy pushing it back into recession. Here a tightening of monetary policy destabilises the economy rather than…...

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