Essay
A* Essay Plan on policies to reduce cyclical instability
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Structure: introduction, 3 points with evaluation, conclusion.
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ESSAY PLAN 4: Assess policies which can be used to reduce cyclical instability in the UK.Introduction:
- Defi nition : Cyclical instability = instability in economic cycle. -- Economic
instability involves a shock to the usual workings of the economy.
Instability tends to reduce confi dence and lead to lower investment, lower
spending, lower growth and higher unemployment.
- Recession = economy contracts, -ve real GDP growth for 2 consecutive quarters
Recessions rarely due to one sole event; many factors leading up to one
- Many causes: changing commodity prices (eg 1974 oil price shock), stock market
crashes, changes in house prices/assets: (For example 2006-10, the US saw its
housing bubble burst with 50% fall in house prices. – caused 2008 recession…)
- Effects: Lack of economic growth/recession, High Unemployment, Long-term
structural deficits, Lack of confidence in finance and consumer sector… =
undesirable
P1: fi scal policy
- Reduce the burden of direct taxation (eg income tax)
o H*: Direct taxes: Basic income tax is 20%, tax-free allowance is
£12,570. Scope for a modest tax cut in the basic rate? // increasing
allowance?
- Lower burden of indirect taxes (cut in standard rate of VAT)
o H*: Indirect taxes: Standard rate of VAT = 20% - could this be lowered?
Could this stimulate consumer spending? .:. boost Ad, greater growth…?
- Increase planned government spending – fiscal stimulus
These options (at least in SR: would involve an increase in the budget defi cit)
.:. perhaps unfavourable for gvmt – but necessary to stimulate econ. activity?
- Automatic stabilisers: (= mechanisms built into government budgets,
without vote from legislators, that increase spending / decrease taxes
when economy slows)
o If private sector demand (C+I+X) is weakening, - case for active use of
policy to stabilise demand (confidence + animal spirits)
o H*: Much depends on the likely causes of a recession (domestic or
external) UK may have little/no control
o Automatic stabilisers such as welfare benefits can help reduce / mitigate
recession risk – help stabilize economic cycle during a downturn
o Automatic stabilizers are features of the tax and transfer systems that
temper the economy when it overheats and stimulate the economy when
it slumps, without direct intervention by policymakers.
o (to help stabilize the economy, the government runs budget defi cits
during economic downturns & run budget surpluses when economy
is growing. = known as expansionary or contractionary fi scal
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