Fiscal/Monetary Policies - & Impacts

Question 1

Fiscal policy vs monetary policy

FISCAL POLICY: Use of gov’n spending and taxation

• during recession - govt spending may inc or taxes cut to stimulate the economy
• in a boom - spending reduced or taxation inc to dampen demand
• approach taken by govt will impact individual investments and thereby raising or reducing profit making capability

Answer 1

MONETARY POLICY - control of interest rates and money supply

• attempts to provide economic control through manipulation of interest rates and money supply
• BoE responsible for Int Rate policy in the UK,

Forward Looking - a change in Int Rates now, only likely to have full impact in 18-24 months time.

Question 2

Impact of the MONETARY POLICY

EASING:

Rates reduced
Asset prices increases 
* Bonds
* Property
Savers suffer
Businesses can borrow more and invest more

Answer 2

TIGHTENING OF THE MONETARY POLICY

Rates rise
Asset prices fall
* Bonds
* Property
Savers benefit
Businesses can borrow less and invest less