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

2. 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

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

4. Video Watch the following video:

5. 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.

6. Tax revenue

7. 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

8. Government spending

9. 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?

10. 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.

11. UK deficit
Progress Arrow

13. Task Who has been affected the most?