Summary Business and the Economic Environment P4 and M2
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Course
P4 & M2
Institution
PEARSON (PEARSON)
P4 - Explain how both fiscal and monetary policy decisions have affected a selected business
M2 - Analyse the effects of fiscal and monetary policies for a selected business in terms of the market it operates in
P4 - Explain how both fiscal and monetary policy decisions have affected a selected
business
M2 - Analyse the effects of fiscal and monetary policies for a selected business in terms of
the market it operates in
P4
In this task, I am required to explain how fiscal policy and monetary policy decisionshave
affected a selected business. I am also required to analyse the effects of fiscaland monetary
policies for a selected business in terms of the market it operates in.
Fiscal Policy
Fiscal policy is the use of tax policies and spending which a government uses to help them to
reach their desired objectives. There are different reasons as to why the government spends
money on things that are not used in our everyday lives. The government spends its money
to meet various environmental and social objectives. Also the government spending is
needed to influence resource allocation, manage the level of aggregate demand. Aggregate
demand is the total of the demand for goods and services produced in the economy over a
period of time. The government also spends money to redistribute income to achieve
greater equality of post tax income. There are different types of government spending; they
are as follows:
Transfer payments – This is money the government gives to people who have no
income. They give them this money to help them get the basic necessities. They try
to encourage them to get jobs because they will be earning much more money that
way. This covers schemes like job seekers allowance.
General government final consumption – This is money the governmentspends on
the public sector. The public sector covers education, NHS, defence etc. The
government spends on these because these are similar to investments for example,
if a person is well educated then when they get a high paying job, they will be paying
a lot back in tax.
Capital spending – Capital spending covers mainly infrastructure. Forexample, if a
school needs to be built; the government is the one who has to pay for it. They also
cover building of roads, building hospitals etc.
There are different reasons as to why the government needs to spend money. Political
parties would spend money to keep promises they had made when they were campaigning.
Also, the government spends money on social projects such as creating new or improving
current parks. Furthermore, the governments expenses rise when a there is a recession. This
is because during a recession a lot of people lose jobs or are made redundant; therefore
they have no source of income. They then therefore, get money from the government
through government schemes such as job seekers allowance etc. Therefore, as more people
will be claiming benefits the government has to spend more money back into these
schemes. Spending in the public sector provides the public the ability to help function the
economy. This is because without the modernisation of our infrastructure the economy
would not be able to thrive. This infrastructure covers road networks, the framework of law
, Business and the Economic Environment P4 M2
and order etc. Due to increased government spending means that government would
charge higher taxes.
Fiscal Policy of United Kingdom in the recession
The UK has been one of the major economies to be leading the calls forfiscal action to
stimulate aggregate demand. Throughout 2008, the UK introduced anumber of fiscal
measures including a £145 tax cut for the basic rate, below £34,800.
There is also a rise in 2.5% VAT, from 17.5% VAT to 20% VAT. There is £3 billionworth of
investment spending brought forward from 2010. The total cost of thesemeasures was
roughly £20 billion. Further measures worth £5 billion were introducedin 2009 including
training help for the young unemployed and a “car scrap” schemewhich offered £2,000 in
subsidy for a new car purchase for scrapping a car over 10years old.
During the recession the government decrease taxation and increases their ownexpenses.
This is because once they increase expenditure and decrease taxation the general public
have more money themselves to pump into the economy. As thisapplies to both the general
public businesses, everyone will have more money. Also,as there will be a lot of disposable
income there will be a higher demand for luxuryitems and general items also.
Also, as the government increases more jobs for the general public, businesses canrecruit
more people meaning the unemployment level will drop.
There are also automatic fiscal policies which would start as soon as the country dips into
recession. The most important fiscal policy is the unemployment policy which ensures that
people will have some income even if they are out of work. Tax revenue is when the
economy expands rapidly, the amount of tax revenue increases which take money out of
the circular flow of income and spending. A fast growing economy means that more of the
general public have jobs therefore the unemployment rate will be very low. Therefore the
government spends less money on benefits as opposed to when within the recession.
As any product which is purchased has a VAT; except for baby products and foodproducts.
In regard to British Airways, they will suffer from this VAT increase. This isbecause the price
of their ticket will go up because of the VAT; therefore they couldpossibly lose customers
because of this.
Tesco is my main example that will not be majorly affected by the rise in VAT. This is
because food productsand baby products do not have an extra VAT cost. Therefore the price
of these 2 types of products will not be charged extra. However, other products which they
sell will have the extra charge of VAT. This includes TV’s, clothes, toasters etc. This means
that customers will be charged extra for these products. Therefore, Tesco could possibly
lose customers because of this.
Government spending cuts
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