Analyse and Evaluate the significance of Fiscal Policy rules Essay Example for Free

Analyse and Evaluate the meaning of Fiscal policy rules EssayL1. monetary policies argon where the government office kinds in the base set of interest to influence the assess of growth of aggregate demand, the bills supply and ultimately price inflation.In the short break away sparingal growth is an increase in real GDP, In the long run economic growth is an increase in productive capacity (the maximum output an economy flush toilet produce) frugal St magnate the avoidance of volatility in economic growth rates, inflation, rentment and un pursuement and exchange rates. supranational Competitiveness The ability of an economys firms to compete in global markets and, thereby, sustain increases in national output and income. L2. fiscal policies can be used to promote economic growth, Economic (this perceptual constancy reduces uncertainty, promotes business, consumer confidence and investment) and International Competitiveness. This causes an ? in AD, which can be go od for an economy. For example if a Government ? interest rates, people will pick up an ? in dispos fitted income, because payments on credit cards will ?, mortgage payments will ? and it is not value saving due to the reduced rate of interest, meaning they begin more to spend on goods and go, so AD ?.L3. Monetary policies can promote economic growth and stability and international competitiveness as changes in the interest rate affects Domestic Demand (Consumer Expenditure, Investment and Government Spending) and National Demand (Net Exports) via tack Rates as when the interest rate ? so the does the currencys chroma. So if the rate of interest increases, so does the strength of the pound, meaning that there is an ? in international competitiveness as more economies want to purchase our currency. This causes an ? in AD make the AD curve to shift to the right, from AD1 to AD2. Causing and ? in employment, ? production and ?economic growth, ?international competitiveness and ?international competitivenessIf economic growth becomes too rapid it can also be dampened nby an ? in interest rates causing AD to ? due to the fact that their credit card charges and mortgages have ? and it has become more worthwhile to keep money in the bank and reap the rewards from a high interest rate rather than spend. So peoples disposable income ?.Monetary Policy can promote economic growth and stability because of the Monetary Policy Transmission mechanism the way in which Monetary Policy affects inflation rates through the impact it has on other macroeconomic variables.It is said that low and stable rates of inflation provide the framework for economic stability as inflation reduces the purchasing agent of money. When the government uses monetary policy to reduce the rate of inflation inflation targeting) they can stop economic stability from becoming unstable as when inflation occurs, and usually wage growth ? there is a danger that inflation will become out of contro l so much so that producers and consumers are no longer able to use the signalling function so it can become clear what goods and services consumers most want. Inflation targeting makes the consumers and investors more clear about the future and so they know what to expect so they can plan ahead. This can cause an ? in C and I and therefore and ? in AD (shifting the AD curve to the right). The fact that inflation targeting is flexible means it meets the policy target.The government can use Monetary to policy to ? the supply of money, so banks have more money to lend, so it is easier for consumers to take loans so there disposable income ?, this can cause and ? in Consumer Expectations and vestments, causing an ? in AD, ?production, ?international competitiveness, ?employment, ? economic stability and ?economic growthL4. HOWEVER whether the Monetary policy is affective depends on many factors, for example it depends on how big the increase or decrease in interest rate is, a small cha nge could make little or no difference for example if income interest is reduced by 0.00000000000000000000001% so people are unlikely to start spending more and it will have little or no effect on AD. It also depends on when interest rates are changed as to what else is departure on in the economy at that time, for example if there is a fiscal policy causing income tax to ? at the same time as a ?in interest rates the affects of the Monetary Policy whitethorn be cancelled out by the fiscal policy.It depends on fundamental banking concern bringing creditability to the target as the central bank has to build up a reputation for coming upon targets. This can lead to low economic growth being traded off for low inflation in the short run, but not the long run, which is what is needed for an economies economic growth to be sustainableThe Central bank must be good at forecasting inflation, as the Monetary Policy kit and caboodle with time lags, there can sometimes be a two year dela y So the Central bank will have to set today the interest rate to affect the rate of inflation it expects in two years time For example Inflation targeting has to be guided by forecasts of inflation and all macroeconomic variables that affect inflation.It also costs a great deal to employ people who have the ability to forecast inflation well which could cost a lot to employ someone capable of doing this, this means that it ? costs, which means the possibility of an opportunity cost involved as that money could have been spent on something else for example new hospitals.There can also always be unforeseen circumstances such as unexpected recessions and natural disasters such as the tsunami, this affects the Central Banks ability to deliver economic stability and economic growth as they do not know if they may need to be doing other policies to help these unexpected situations, as they may only be able to do so when the economies conditions are stable.To conclude Monetary rules and F iscal Policy targets and constraints can promote Economic Growth, Economic Stability and International Competitiveness, however there are many factors to take into account when doing so.