If house Prices fall it will cause significant problems for the UK economy. There will be a fall in consumer wealth, and declining house prices can lead to negative equity. (house prices are less than what people bought them for). Therefore, some people will have their home repossessed and will also owe money on their old mortgages. The effects of a fall in consumer wealth will be to reduce confidence and consumer spending; equity withdrawal will slow down sharply – this has been a significant contributor to increasing AD in UK).
In order to combat this deficit spending, taxes are increased to generate more revenue to pay off this spending. In response, consumers will spend less money and save more, thus causing a decrease in consumption and less money in the economy. Soon, there is a decrease in investment because products are not being sold. Prices drop, and the economy lowers into a recession.
Therefore, when the aggregate demand compared with the economic production capacity is quite low, expansionary monetary policy should be taken into use appropriately. Negative monetary policy is to reduce the level of aggregate demand by cutting the growth rate of money supply. In this policy, it is difficult to obtain the credit and the interest rate increases as well. Therefore, when the inflation is serious, the negative monetary policy is more appropriate. (Stanley Fischer,1993) Monetary policy includes seven aspects: I. controlling the amount of currency issue.
Identify two areas of government regulation and explain why this can be seen as a bad thing for businesses. Taxation may lead to businesses being driven out of the country due to high taxes and due to this businesses will move to countries with lower tax rates to maximise their profits. Building regulation stops the growth of businesses because without the approval of the government businesses’ cannot expand
As a result, the social welfare of those developed nations decreases. It is thus more difficult for workers to find a job in line with their skills and qualifications; they receive a lower income and they have less time for leisure activities. Plus, this international division of work may lead to economic disequilibrium in developing countries. To get wealthier, they focus their economic activity on the trade with developed countries instead of focusing on their own economic development. This can lead to a shortage of food in third world countries and to starvation of their population, as some of those countries are exporting the major part of their production to developed countries.
Minimum wage is defined as the minimum amount employer need to pay and this amount is set by the government through legislation. If there is no minimum wage, the keen competition between workers for limited jobs would cause wage to fall until it reach the equilibrium wage, so minimum wage is set to prevent wages from falling and remain in acceptable level. Most labour markets in the developed country is affected by minimum wage, it has a large potential impact towards the economy. Hence, it is important to understand the economics effect of minimum wage to the economy. In demand and supply curve, the intersection point of demand and supply curve is the market equilibrium, where the equilibrium supply is equal to the equilibrium demand.
Economics Using a diagram explain how the government can use fiscal policy to alter the level of A.D (aggregate demand) in the economy? * Aggregate demand is the total spending on goods and services in a given time period. Aggregate demand curve has the total quantity of all goods and services and average price levels for all goods and services. The aggregate demand curve shows the relationship between Average Price Levels and Real Output. The Components for Aggregate Demand are C (consumption)+ I (income)+ G (government spending)+ (X-M) (net exports) and a change in the components of Aggregate demand will cause a shift of the curve.
Evaluate the effectiveness of demand-side policies to reduce inflation Plan: * Define demand-side policies and inflation * Differentiate between fiscal policy and monetary policy * How they can be used to reduce inflation – changing tax, government expenditure, changing money supply and altering i/r and exchange rates * Explain the benefits / downsides of using demand-side policies against using supply side measures and physical policies Demand side measures, or demand management, are policies used to reduce inflation by altering aggregate demand and are usually associated with Keynesian economics. Inflation is the persistent or continuous rise in the general price level or a fall in the value or purchasing power of money. It is usually measured using a consumer price index. Demand-side policies can be divided into two different types of policies; fiscal policy and monetary policy. Fiscal policy concerns the use of changes in the amount of taxation (T) and government spending (G) to influence the national economy.
Income elasticity of demand measures the change in demand in relation to the change in consumer's incomes. A negative value for income elasticity of demand indicates that when consumer's incomes rise, quantity demanded for the bus service decreases. This is most likely to do with the fact that they may change to using a car of their own, instead of using the bus. This is not good for the bus operator because he may lose customers (his demand may decrease) if their incomes rise. It could therefore be said that an increase in the incomes of consumers could cause the bus operators revenue to decrease due to a fall in demand.
Therefore, if MPC and consumer confidence is at a low, consumers will spend less and save more therefore resulting in a decrease in total consumption levels. This consequently will result in an increase in taxation, as there is a decrease in the circular flow of income, meaning governments have to increase taxes in compensation for the lack of spending. Due to this taxation increase the level of real disposable income, or RDI, amongst consumers will decrease and therefore decreasing consumer