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18- Government Economic Policies
Transcript of 18- Government Economic Policies
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Government Economic Policies
Lesson outcomes:
Demonstrate an awareness of the impact thattax and interest rate changes might have on
business decisions
Know how interest rates affect business Know how different tax changes affect
business
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Controlling the economy
The policies the governments use to control
the economy
Monetary
Fiscal
Supply side
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Changes in government policy
The main tools that the government uses to managethe economy are taxation and spending.
Monetary Policy- involves the government changingthe quantity of money available and changing thebase rate of interest.
Fiscal Policy- involves the government altering itstaxes and spending in light of what is happening inthe economy.
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Controlling the economy
The policies the governments use to control
the economy
Monetary
Fiscal
Supply side
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Monetary Policy
Using higher interest rates will impact a
business in three main ways:
1. Increases interest costs and reduces profits
for business that have very high debts
2. Reduces consumer borrowing and this
reduces demand for goods bought on credit
3. Tends to lead to an appreciation of the
countrys exchange rate.
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Interest rates
The interest rate is a cost or a reward
It is a cost for borrowing, or a reward forlending or saving
It is usually written as a percentage
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If interest rates increase
People will save
Businesses will borrow.
Individuals will borrow.
People and businesses will pay on their loansand mortgages
Overall people will spend . money on goods andservices
Demand for goods and services ..
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Controlling the economy
The policies the governments use to control
the economy
Monetary
Fiscal
Supply side
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Fiscal Policy
Includes Taxation
Public Expenditure
Public borrowing
Politics influence fiscal policy
Government
Spending
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Government Spending
The government spends money
1. To provide goods and services2. To help poorer or unfortunate people in the
community
3. To help businesses
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Why does the government make
us pay taxes?
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Why pay taxes
1. It pays for the goods and services the
government provides.
2. The government uses taxes to raise the price
of some goods that cause external costs so
that people buy less of them. E.g. Cigarettes,
alcohol and petrol.
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Taxation
Taxation comes in two forms:
Direct taxationtaxation on income andprofits (income tax, National Insurance and
corporation tax).
Indirect taxationtaxation on spending (VAT
and custom & excise duty).
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Value added tax (VAT)added to goods
and services. A rise in VAT increases
prices
20%
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Corporation taxis a tax on companyprofits. A rise in this tax means
companies keep less of their profits
leading to less company investment andthe possible loss of jobs
c. 30%
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Customs and Excise duty - Customs Duty is a tax
charged on importation of goods produced
outside the European Union (EU).Excise Duty is a tax on certain goods such as
alcohol and tobacco.
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Questions4 marks each
1. The basic rate of income tax rises to 25%(from 20%)
How could this affect businesses?
2. The government cuts local governmentspending
How could this affect businesses?
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If the government wants to slow the
economy down it would
. Taxes
..spending
This would be that people would have money to spend on goods and
services
The economy would get ..
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If the government wants to speed the
economy up it would
. Taxes
..spending
This would be that people would have money to spend on goods and
services
The economy would get ..
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Controlling the economy
The policies the governments use to control
the economy
Monetary
Fiscal
Supply side
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Supply side policies are used by
government to improve the efficient
supply of goods and services in theircountry
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Supply side policies
Privatisation:- The aim is to use the profit motive to make businessmore efficient
Focus on increasing supply in the economy by: Helping markets to work more efficiently to increasecompetitiveness of industries
Include policies to: Retrain people to meet employers needs
Improve the efficiency of the labour market
Contribute to: The reduction of unemployment
Economic growth
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Activity 4.2 Pg 58
Activity 4.3 Pg 62