Chapter 2: The economic environment for business
2.0 Outline of macroeconomic policy
Policy objective
Growth
Inflation - low
GIBE
BOP stability
Employment
Policy instrument
Instrument
Monetary policy (M I C)
Influences aggregate demand by
a) money supply
b) interest rate
c) credit controls
Fiscal policy (B E R)
Managing aggregate demand by
a) Borrowing
b) Expenditure
c) Revenue
Exchange rate policy
The strength and weakness of exchange
rate will influence
a) Import & export
b) BOP
c) Interest rate
External trade policy
a) Expenditure-reducing policies
b) Expenditure-switching policies
2.1 Fiscal policy
Borrowing
Public sector net cash requirement
(PSNCR) = amount that gov must borrow
- Gov needs to spend money to
provide services & goods
- Giving grants to private companies
- Taxation
- Direct changes to users of
government services
Expenditure
Revenue
Stimulate demand
Increase demand – spend more
- Eg: education
- The extra spending financed by
higher taxes or borrowing
Increase demand – reduce taxes
- Allowing firms and individuals
more after tax income to spend
- The tax cuts can be financed by
borrowing
2.2 Monetary policy
a) Money supply – medium term target
increase in
money supply
raises prices and
incomes
raise demand spending more
Gov prints more money to stimulate economy
b) Interest rates
HIGH interest rate
to reduce money
supply through credit
encourage savings
increase mortgage
payment
prevent some local
investment & attract
foreign investor
increase in the
currency exchange
rate
c) Credit control
Minimum balance held by banks!!!
- increased reserved held by bank means less credit lent to customer, so less to
spend
2.3 Exchange rates policy
2.4 External trade policy
2.5 Competition policy
2.6 Green policy