Far 1

1. Assess the impact of fiscal and monetary policy on business organizations and their activities
1.1 Fiscal policy
Fiscal policy is equipment which government uses to adjust its spending levels and tax rates to monitor and influence a national economy. Fiscal policy involves government taxation, spending and policies. It is the sister strategy to monetary policy.
The two main tools of fiscal policy are taxes and spending. Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals have to spend. Spending is used as a tool for fiscal policy to drive government money to certain sectors that need an economic boost.
The purpose of Fiscal Policy
• Stimulate economic growth in a period of a recession.
• Keep inflation low (UK government has a target of 2%)
• Basically, fiscal policy aims to stabilize economic growth, avoiding a boom and bust economic cycle.
GDP = Consumption + Investment + Government Spending + Net Exports
Fiscal policy has an effect on each of these categories. There are two types of fiscal policy: Expansionary and Contractionary.
It can significantly impact the national income.
Public spending can stimulate the macro-economy
Public expenditure can be used to help stimulate the macro-economy at times of low and negative growth. This works by increasing the level of aggregate demand, and can compensate for failings in other components of aggregate demand, such as a fall in household spending on consumer goods and firms spending on capital goods. It can also be used when monetary policy has proved ineffective. This could be the case when interest rates are already low, but the economy still needs stimulating.(Fiscal Policy, 2009)
Public spending can improve the infrastructure of an economy
If the spending is on capital items, then infrastructure can be developed, which can help improve competitiveness and economic growth. Infrastructure...