Policy Instruments Fiscal Policy Monetary policy Supply side policy Exchange rate policy

Macroeconomic objectives Policy instruments are used to address economic objectives which include Economic growth Low unemployment Low and stable inflation Balance of payments equilibrium Balanced budget Redistribution of wealth – increase standards of living

Fiscal Policy The use of Government Spending, Taxes and Government borrowing to manage the economy

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Direct versus Indirect Taxation Direct taxes – are paid directly to the Exchequer by the individual taxpayer – usually through “pay as you earn”. The same is true of corporation tax, paid by companies. Indirect taxes – include VAT and a range of excise duties on oil, tobacco, alcohol. The burden of an indirect tax can be passed on by the supplier to the final consumer – depending on the price elasticity of demand and supply for the product.

Tax revenue

Fiscal Policy In action Tax changes will result in changes to disposable income So changes in taxation rates can be used to manipulate the economy Government spending can create demand and increase GDP

Government spending

Task What will be the effects on the economy if the Government: reduces Income Tax increases spending on public projects such as new school How does this relate to AD=C+I+G+X-M And the AS courve? BUT – what will be the impact if they do both of these?

The UK's budget deficit As a country, we've grown accustomed to living beyond our means. The Government's tax revenues are rarely enough to fulfill its generous spending promises, so every year Britain runs a large budget deficit.

UK deficit Progress Arrow

Task Who has been affected the most? www.bbc.co.uk/news/business-12805893