Balanced Budget Multiplier and Government Economic Policy

Study Notes

Raising taxes and spending by the same amount increases aggregate monetary demand due to the balanced budget multiplier effect.
Government spending can create and increase inflationary pressures, leading to more unemployment.
Fiscal policy is used to reduce unemployment and stimulate employment through measures such as increased government spending on capital projects and government-funded training schemes.
The impact of changes to a government's fiscal policy is not always certain and can have knock-on effects on other aims.

Government fiscal policy has important implications for the balance of payments, as it can lead to higher domestic prices and make imports relatively cheaper and exports less competitive.
The policy affects savers, investors, and companies, with companies being impacted by tax rules on dividends and profits and tax breaks for certain activities.

The government balances its fiscal policy to impact savers, investors, and companies alike.
The planning of a government's fiscal policy follows an annual cycle, with the most important statement of changes to policy being the budget in the autumn of each year.
The Chancellor of the Exchequer also delivers a pre-budget report in the spring.

Monetary policy involves changing the interest rate (the price of money) and influencing the money supply by changing the amount of money in circulation.
The six basic goals of monetary policy are price stability, higher employment, economic growth, stability of financial markets, interest-rate stability, and stability in foreign exchange markets.

Since 1997, the UK's central bank is the Bank of England (BoE), which influences the amount of money in the economy and how much it costs to borrow.
The BoE's most important aspect of monetary policy is the interest rate that can be charged to banks to borrow money (Bank Rate).
The second is the asset purchase (quantitative easing-QE) that BoE can create digital money to buy corporate government bonds.

The Monetary Policy Committee (MPC) decides what monetary policy action to take.
The MPC has the responsibility of setting interest rates, with the aim of meeting the government's inflation target of 2%, based on the consumer prices index (CPI).

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