Importance Of Improvement In The Economy

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Register to read the introduction… For example, a short run improvement to the economy would be that a decrease in income tax would result in households having more disposable income. The government then hopes that this money would be spent into the economy and thus increase economic activity and demand. This is a necessity for economic growth, for example from extract G “without sufficient demand, the economy will not recover.” A long run improvement to the economy would be that with this increase in demand the firms are expected to react to this by increasing supply, as they have an incentive to increase supply due to them selling more and thus maximising profits, these firms investing and expanding will increase the productive potential of the economy. For example in extract g ‘’A cut in tax rates has supply side benefits.” An expansion of firms also means a higher demand for labour; this will reduce the unemployment rate. This also improves the distribution of income, a reduction in the unemployment rate with result in households yet having more spending power and yet encouraging more economic growth. An increase in employment will result in an improvement in the budget deficit as there will be a decrease in the demand for welfare benefits, thus improving the economy. The increase in the supply of goods and services (due to an increase in demand) is also …show more content…
Monetary policy is used to alter interest rates to manipulate economic activity in the UK, in this case the Bank of England would reduce or increase the interest rates dependent upon their strategy for improvement in the economy. In this case, according to source F, consumers are encouraged to save due to the unhealthy economy being a result of massive amounts of consumer debt. For example “we are suffering the consequences of a decade of growth fuelled by debt.” And “politicians are encouraging us to save rather than spend money we do not have.” This increase in saving is a contractionary monetary policy designed to reduce consumer spending, an impact upon the economy would be a reduction in inflation, due to decreased demand pull inflation as there is not enough supply for the firms to match the needs of demand that is fuelled by excessive borrowing., the excessive demand drives prices up as there is too much money chasing too few goods. An increase in interest rates also tackles the issue of increased spending and thus an excess of demand in the economy accompanied by debt, as it will give consumers less incentive to borrow as the amount they must pay back will rise, this is also accompanied by an increased return on consumers money when they save. The long term effects of this policy may reduce firms incentives to expand and may even reduce the demand for their goods that market failure

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