Fiscal and Monetary Policy

Introduction As an assistant tutor for Skanska I ache been asked by my manager to explain how pecuniary and financial indemnity decisions attain the argumentation in which I work. To undertake this task I testament provide explanation of the pecuniary and monetary policies. I impart besides explain what kindle rate is and what could be possible changes on it. Addition bothy, I volition explain how both policies could make changes in engagement train. Fiscal constitution Economic clime is essential to be controlled at bottom every single county beca hire this helps control of the essence(p) activities inside the particular ground.All countries where thriftiness is developed created and fol depressed polices which ensure that property spent by political relation ar used in an appropriate stylus. Those policies are known as fiscal and monetary policies. Fiscal insurance Fiscal insurance insurance polity could be defined as a legislation which was introduced b y regimen to control the frugality. The fiscal policy control and rivals existence evaluateation, public expenditure and borrowing silver. Fiscal policy includes direct and confirmative measureation, public cover, public sector borrowing, pre-budget report and redistri merelyion of income.The purpose of fiscal policy is to monitor, control and support prudence as a whole. (Ref. http//www. investopedia. com/ limits/f/fiscalpolicy. aspixzz1nhAdVG74) Taxation Taxation could be defines as a prayer of money by governance from their citizens and hatful feares to found deedal expenditure of the inelegant. Changes in levyation would wipe out a large influence on economy because amount of obtained money could be spent for varied purposes or needs of the country. Taxation could be divided into two main types which are direct and indirect tax r purgeueation. Ref. Book occupation aim 3, Book Publisher Edexcel pageboy 300 Author John Bevan) account Taxation This particu lar type of taxes is paid by population and personal credit linees on their income and profit. If the amount of income is spirited(prenominal) than the high will be direct tax which will subscribe to be paid. Direct taxes could be compile by government in ferment of income tax, corporation tax, council tax, working tax, road tax, capital gains tax, inheritance tax, impression duty, national insurance (NI). (Ref. Class nones- Direct and Indirect taxation Lecturer- Brenda Horan Date- 06/02/2012) Income TaxIncome Tax order 2011-12 by tax curing and type of income Income tax is a main financial source for government to found activities of the country and public services. This is pay by anyone within the country who has an income. It is protected by legislation that administrations and individuals make up to establishment how much income was generated for each(prenominal) year. Income tax could be calculated in three ways which is 20, 40 and 50 percent. Addition on the who ley, there is a possibility of person-to-person allowance which means that some people income is not assessable as they do not dischargeed enough to pay income tax.This tax year the basic personal allowance or tax-free amount is ? 7,475. Further more(prenominal), some people may be entitled to a high Personal Allowance if they have reached the age of 65 or over. (Ref. http//www. hmrc. gov. uk/incometax/basics. htm) National Insurance Contributions This is some other form of tax which is ground on income. National Insurance contribution also known as NI is paid by employees and employers to the government. NI is dependable on the amount of money which is earned by each party and whether people are employed or self-employed.Through National Insurance contributions employees are mental synthesis up to entitlement for contrastive social earns if they have to. Additionally, NI building up a form of solid ground pensions when employees would be retired. in that respect is one restriction where people do not have to pay NI and this is when they reach retirement age. (Ref. http//www. hmrc. gov. uk/incometax/basics. htm) Corporation Tax Corporation tax is a form of tax which is based on taxable profits of all businesses. This is why organisations do their best to keep down amount of corporation tax.The most crude way to deduct the amount of corporation tax is to reinvest the profit into the further development of the business. (Ref. http//lexicon. ft. com/Term? term=corporation-tax) Indirect Taxation Indirect taxes are charged by government on producers or suppliers. The main aim of these taxes is to down pollution and improve the environment. The examples of indirect taxes are value added tax ( bathing tub), excise duty, air passenger duty, insurance taxes such as car, home or pet insurance, TV licence or driving licence. (Ref. http//tutor2u. net/economics/revision-notes/as-marketfailure-indirect-taxation. tml) Value Added Tax (VAT) This type of tax is charged almost on all products or services provided by organisations. For instance businesses pay VAT for all products which are needed to manu eventure the products and thus VAT is paid by customers if they want to buy construct products. VAT could be charged into three different rates which are standard rate 20%, reduced rate 5% and zero rated 0%. Standard rate is most common form of VAT and this is paid on almost all products or services unless they have been specified to reduce or zero rate.Reduced rate is depend on products its self and the circumstances of the sale. The most common example of reduced rate VAT are domestic fuel and power, installation of energy pitch materials, sanitary hygiene goods or childrens car seats. Zero rated VAT is similar to the reduced rated VAT as is depend on products its self and the circumstances of the sale. The example of this type of VAT could be products or services such as food apart from the meals purchased in restaurants or hot takeaways, books and newspapers, childrens clothes and shoes, public transport. (Ref. http//www. hmrc. gov. k/vat/start/introduction. htm) Excise Duty This is another form of indirect tax which is only paid for certain products on the market. Excise duty tax is added to the goods or services which magnate be luxuries, danger for environment and harmful for the health of population. The examples of products which include excise duty are tobacco, liven up and beers, oil or gambling. The government has introduced excise duty to augment amount of overall involveed taxes but also to decrease the demand for particular products. (Ref. http//customs. hmrc. gov. uk/channelsPortalWebApp/channelsPortalWebApp. ortal? _nfpb=true_pageLabel=pageExcise_InfoGuides) Air Passenger Duty Air passenger duty is paid by airline businesss to the government for carriage passengers from UK airports. International booked passengers who are coming into the country are exempted to pay this duty. Since 200 9 air passenger duty is paid by the amount of flies whereas use to it was charged by every single passenger. The changes amended in this type of taxation step-upd prices of airline tickets as organisations are forced to pay more taxes. The main purpose of collection of air passenger duty is to develop extra funds to upport economy but also for environmental reasons. (Ref. Book Business take aim 3, Book Publisher Edexcel Page 301 Author John Bevan) Public Finances Public finances could be referred as the amount of money which government pays for its expenditures through collection of taxes and borrowing. To support community within the country the government provides valuable activities such as security, education, transport and health support. Running the following activities cleverness cost government millions so this is why appropriate amount of pile up taxes is essential.Government have to balance overheads for different departments in appropriate way and ensure that money s pent in certain area would realize population and generate future give up in the economy. (Ref. http//glossary. econguru. com/economic-term/public+finance http//www. etvotenow. org/financial-tips/public-finance- rendering-know-your-environment-in-the-business-world-233. html) Public Sector get Public sector borrowing also known as a Public Sector exchange Requirement could be defined as an amount of money which government has to borrow from Bank of England to crop essential activities provided to the public.Public sector cash requirement occurs when the country does not collect enough finances to trade overheads of essential activities. If that would happen, then country will start going into the debt what would disadvantage economy and community as less money tycoon be invested in public intimacy. (Ref. http//www. qfinance. com/dictionary/public-sector-borrowing-requirement) Impact of Fiscal policies on Skanska? Changes made within Fiscal policy would have a large usurpati on on business public presentations. Skanska could be restoreed by any decisions made within these policies as any decisions could change the activities and revenues of the business.For instance, if government cut down the spending costs to build hospitals or motorways then Skanska will lose contracts, which just now means there would not be projects undertaken by my organisation. This site would be reflected in the release of employees as the organisation might not be able to afford to maintain workforce. Additionally, this would affect the manufacturing organisations as they would not be able to preparation Skanska with their products and therefore less money will be generated and flowed into the economy.How does Fiscal policy affect Skanska? Skanska operates in construction industry so any changes in fiscal policy would affect overall operation of this business. Skanska as a one of leading construction organisations in the United realm would be affected by positive or nega tive outcome. For instance, if government would change income tax band from taxation element for higher then this would benefit this organisation as there would be a possibility to pay lower amount of taxes by Skanska.The example could be that if government increase the income tax band of 50% from 150,000 to 200,000 then my chosen organisation would generate higher revenue as even if they would achieve revenue of 180,000 the business will under the 40% of income tax band. The effect of changes in this fiscal policy could create more profit for Skanska so owners, stake admiters and employees might benefit from this fact as higher amount of money obtained by the business could be shared into these parties. Additionally, the result of fewer taxes paid by my organisation would nathnelo investors and owners to reinvest extra income in the business.Reinvestment of generated profit would be equalised to the expansion of Skanska what might create new jobs for employees repayable to furthe r investments. Changes in public sector borrowing would also affect Skanska because if government would not collect enough taxes than it automatically decrease amount of possible spendings into the economy. In the past the government applied Golden dominion of public borrowing which state that it should never be borrowed more than 40% of overall income from economy. Due to recession in United Kingdom the government has to break this rule to reduce possibility of bank collapse.In 2010 the government decided to introduce Fiscal Responsibility Act which is about pass the amount of government borrowing. This act is mended to stop the country to follow into the debt. Due to breaking Golden Rule decision my chosen organisation had better opportunities to undertake any projects as more money were flux into the economy. (Ref. Book Business level 3, Book Publisher Edexcel Page 301 Author John Bevan) Monetary Policy Monetary policy is interlinked to fiscal policy and it was created by the government to support and control an economy activities.Monetary policy influence center demand, employment level, money supply, the occupy rate that is offered by central bank and the level exchange rate within the country. In the United Kingdom the central bank is the Bank of England which is in charge of interest and exchange rates or money supply. Additionally, the Bank of England is responsible for the amount of money that banks need to keep in the vault which is also known as bank reserves. The purpose of monetary policy is to control and stabilize overall economy within the country. (Ref. http//www. nvestopedia. com/terms/m/monetarypolicy. aspixzz1oQuE0cW4) entirety Demand Aggregate Demand could be defined as the total demand for provided goods and services produced within the economy over a certain period of time. Aggregate demand is considered as the sum of enjoyment, investment, government spending, and net exports. Aggregate demand has a large influence on the economy as a whole because its increase or decrease would generate positive or negative outcomes in the economy. (Ref. http//finance-dictionary. com/definition/a/aggregate-demand/) Interest RateInterest rate could be defined as the amount of percentage charged by lender usually banks to the borrower. The percentage of interest rate is based on the annual basis also known as Annual Percentage Rate (APR) and this is dependable on the value of borrowed money or assets. The example of borrowed assets could be cash, beneficial goods of consumers and large assets such as vehicles or premises. If the interest rate is low then there is frequent possibility of larger investments as the businesses do not have to pay back much more than it was borrowed from the bank. Ref. http//www. investopedia. com/terms/i/interestrate. aspaxzz1oRT2mwKL) Employment Level Employment level could be defined as the population who is currently working and this is presented in form of percentage. The level of employment is very important factor to be considered by government because through this aspect the taxes are collected which could be reinvested into the economy. Employment level is affected by monetary policy because if inflation level would increase then more possible the wages of employees would be higher.The overall result from this situation could be that the employer might reduce workforce to cut down cost which possibly would decrease aggregate demand referable to less people would have confidence in spending money. (Ref. http//www. economicshelp. org/blog/453/unemployment/definition-of- cosmetic surgery-employment/) Impact of Monetary policies on Skanska The changes in monetary policy would have a large influence on my chosen business because changes amended in these policies could have knock-on effect in my organization.For instance, changes of the interest rate for lower could lead to the situation where Skanska might invest in latest machinery as interest rate on this purchase w ill be lower so the business would save money if the make a purchase in this period. Additionally, low interest rate might create situation where population would be less likely to make a savings due to low interest which they could receive. If population would not be fire in saving then they would prefer to spend the money which they earn so the economy would benefit as the aggregate demand would increase.How does Monetary policy affect Skanska? Implementation of monetary policy could affect industry within my chosen business operates. Through increase or decrease of interest rates Skanska would be affected by the changes in demand of provided services by population. For instance, if government would decrease the level of interest rate than this might stimulate higher aggregate demand because people would have more money to spent. If population have a confidence to spend money than my chosen business is more likely to convince potential customers to make the purchase.Additionally , lower interest rate would attract Skanska for new investments due to low interests which need to be paid back. This is also easier for construction industry to find new invertors all over the world as in this period investors are able to generate large return of invested finances. If government and central bank would decide to raise interest rate than this would disadvantage my chosen organisation as opposite effect which most likely would reduce aggregate demand and inflation. Employment level would be affected by changes in monetary policy which could create different situations within operation of Skanska.Government do their best to keep inflation at 2% which means that economy would be horse barn and wages would be increase by similar level. Low raise of inflation would means that employees have a job security due to steady costs of business. For instance, if inflation would drastically rise then wages would increase besides so as a result business might not be able to afford workforce due to too high overheads. (Ref. http//tutor2u. net/economics/ capability/topics/ad_as/ad-as_notes. htm) How fiscal and monetary policy would help Skanska to achieve its objectives.Skanska committed their selves to outperform business in the caution of the environment, health safety and the engagement with the communities they work in as well as the project performance and profitability. The achievement of main aims is depended on the legislations of government. Through changes in fiscal policy my chosen organisation would be able to generate outcome which would benefit the business and the productivity of economy. For instance, if inflation change magnitude due to raise of aggregate demand than increased spending would most probably decrease national debt at to the lowest degree in short term.Also decrease of income tax would increase the amount of available organisational income which might increase the aggregate demand. Appropriate changes in fiscal policy could cr eate significantly impact the national income and therefore have immediate effect on the economy. Another benefit which Skanska could obtain from changes in fiscal policy is higher profitability and motivation of workforce if taxes on wages would be decreased. Additionally, if higher amount of people and organizations would earn more than automatically the government would collect more taxes such as VAT or income tax.Growth of economy would also means that government would spend less money for different types of benefits which support unemployment community. (Ref. http//12chunso. wordpress. com/2011/05/11/advantages-and-disadvantages-of-fiscal-policy/ http//library. thinkquest. org/19110/ slope/advantag/index. html http//www. economicshelp. org/macroeconomics/fiscal-policy/fiscal_policy. html) On the other hand, Fiscal policy have great influence on businesses operation so government have to ensure that amended changes do not affect the organisations in the way that they would not b e able to operate.For instance if government would increase the income tax as too high level than organisation would not be interested in feather operations as too much amount of taxes which will have to be paid to government would be seen as not reasonable and the organisations might be closed down. This would create negative outcome for economy because if businesses will be closed down then unemployment would increase and more money government will have to spend to support those people and no taxes at all would be collected as organisations would abandon from operations.Additionally, changes in direct taxation or government spending may take considerable time because of both political and moral reasons. For instance, taxing rich people more than the others might be seen as foul treatment for parties who are charged higher. (Ref. http//12chunso. wordpress. com/2011/05/11/advantages-and-disadvantages-of-fiscal-policy/ How monetary policy would help Skanska to achieve its objectives . http//www. ehow. com/facts_5796267_benefits-policy-over-fiscal-policy_. html) ConclusionOverall, I have described what fiscal and monetary policies are and what is involved in those aspects. Also I have explained how does policies affect my chosen organisations and what out6come could be generated through changes in both policies. The fiscal and monetary policies are closely interlinked to each other. Fiscal and monetary policies are very important to be managed in an appropriate manner by government because wrong changes would not only affect businesses within the country but also the economy as a whole will be affected.Bibliography AuthorPageDate John Bevan Book- Business level 3 Page 300-305 Publisher Edexcel Class notes- Direct and Indirect taxation Lecturer- Brenda Horan Date- 06/02/2012 http//www. investopedia. com/terms/f/fiscalpolicy. aspixzz1nhAdVG74 http//www. hmrc. gov. uk/incometax/basics. htm http//lexicon. ft. com/Term? term=corporation-tax http//tutor2u. net/economi cs/revision-notes/as-marketfailure-indirect-taxation. html http//www. hmrc. gov. uk/vat/start/introduction. htm http//customs. hmrc. gov. k/channelsPortalWebApp/channelsPortalWebApp. portal? _nfpb=true_pageLabel=pageExcise_InfoGuides http//glossary. econguru. com/economic-term/public+finance http//www. etvotenow. org/financial-tips/public-finance-definition-know-your-environment-in-the-business-world-233. html http//www. qfinance. com/dictionary/public-sector-borrowing-requirement http//www. investopedia. com/terms/m/monetarypolicy. aspixzz1oQuE0cW4 http//finance-dictionary. com/definition/a/aggregate-demand/ http//www. investopedia. com/terms/i/interestrate. aspaxzz1oRT2mwKLFiscal and Monetary PolicyTOMAS L. OLFATO ANSWERS TO GROUP 4 EXAM ECON 204 (NOTE ANSWERS ARE HIGHLIGHTED IN YELLOW) PART I. (5 points each) A. An increase in government spending will shift the IS curve to left increasing output with higher interest rate. pic Expansionary monetary policy or Contractionary monetar y policy. a) To maintain the same level of output, what monetary policy should BSP implement? ANSWER EXPANSIONARY MONETARY constitution (Increasing money supply lowers interest rate) b) To maintain the same level of interest rate, what monetary policy should BSP implement?ANSWER CONTRACTIONARY MONETARY POLICY (Reducing money supply results to an increase in interest rate) B. An inflationary gap occurs when aggregate demand exceeds aggregate supply at affluent employment level of output. When there is increased spending and availability of money are high, prices start to rise resulting to an inflationary gap. What fiscal policy (Expansionary or Restrictive) should the government implement to dampen offshoot and lower inflationary pressures(5 points). ANSWER RESTRICTIVE FISCAL POLICY (Racing taxes or cutting government spending to dampen GDP(Aggregate Demand) growth and lower inflationary ressures) pic C. A Deflationary gap occurs when aggregate supply exceeds aggregate demands at full employment level of output. The opposite of Inflation, deflation has the side effect of increased unemployment which can lead to economic depression. What fiscal policy (Expansionary or Restrictive) can government implement to stop severe deflation(5 points). ANSWER EXPANSIONARY FISCAL POLICY ( Increasing government purchases, decrease in taxes and/or increase in transfer payments closes a recessionary gap, stimulate the economy and decreases the unemployment rate) pic PART II. (2 points each) True or False FALSE 1. The Keynesian school of fancy is based on the premise that free markets can regulate themselves alone, free of any human intervention. There is an invisible hand that moves market towards a natural equilibrium, without the requirement of an intervention. TRUE2. Keynesian economic models stress the fact that government intervention is absolutely necessary to ensure growth and economic stability. The government has the very important job of smoothing out the business cycle bumps.TRUE3. In the Goods market, an increase in interest rate will result to a decrease in Money Demand while a decrease interest rate will result to an increase in Money Demand. TRUE4. In the financial market, an increase in interest rate will increase Money Supply while a decrease in interest rate will decrease Money Supply TRUE5. In liquidity trap, people are indifferent as to how much money or how many bonds they hold, so they are willing to hold fewer bonds and more money (more liquid) at the same nominal interest rate.The money supply will increase but the effect on the nominal interest rate remains zero. All the additional money is held as idle balances and equilibrium is unchanged. FALSE6. Disposable Income excludes both the negative impact of taxes and positive impact of transfer payments. FALSE7. Transfer payments decreases disposable income TRUE8. Fiscal neutrality creates a condition where demand is neither touch on nor diminished by taxation and government spe nding. TRUE9. Crowding out effect happens when expansionary fiscal policy causes interest rates to rise, thereby reducing the investment or spending.If an increase in government spending and/or a decrease in tax leads to a budget deficit and this deficit is financed by increased borrowing, this creates demand for money and loanable funds. This will increase interest rates leading to a reduction in private consumption or investment. FALSE10. Expansionary fiscal policy increases national saving thereby reducing the supply of loanable funds and raising the equilibrium of the interest rate. PART III. (5 points each) 1. A monetary policy wherein the government move on the break. RESTRICTIVE MONETARY POLICY 2. A policy that focuses on controlling price and interest rates.MONETARY POLICY 3. The most popular policy instrument. OPEN MARKET OPERATIONS 4. A monetary policy instrument in which BSP have no total control. DISCOUNT RATE 5. When the government wants to reduce the money supply in o pen market, it has to. SELL BONDS TO THE PUBLIC PART IV. (10 points) If the government wants to solve the issue on economic growth by increasing the money supply, what should be the effect on interest rate, investment, and consumption? MONEY SUPPLY, v INTEREST RATE, INVESTMENT, CONSUMPTION Please email your answers to emailprotected com with copy to emailprotected com and emailprotected com THANKS