1. 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
BoE – March 2009 – IR at 0.5%
Mrs Gordon's notes

2. 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
Since 1997, the BoE has had operational independence in the setting of interest rates. The Bank aims to meet the Government's inflation target - currently 2.0 per cent for the consumer price index- by setting short-term interest rates. Interest rate decisions are taken by the Monetary Policy Committee (MPC) at their monthly meetings.
New ‘in’ term …
Quantitative easing!
Mrs Gordon's notes

3. 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.
Mrs Gordon's notes

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

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

6. 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.

7. 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.

8. 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.

9. 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.