Government action is important for changing how much people want to buy (aggregate demand, or AD) and how much businesses can create (aggregate supply, or AS). Here’s how it works:
Fiscal Policy: This means how the government uses money. By changing taxes and how much they spend, they can affect AD. For example, if the government spends an extra £10 billion, it can help boost AD. This could lead to an overall increase in the economy of about £15 billion.
Monetary Policy: This is about how central banks, like the Bank of England, use interest rates. When they lower interest rates, it becomes cheaper to borrow money. For instance, if they cut the interest rate from 0.75% to 0.25%, it makes loans cheaper for people. This can encourage people to spend more money and increase AD.
Supply-Side Policies: These are steps taken to help businesses produce more. Investing in education and training can help workers do their jobs better. If workers are more skilled, it can raise the overall supply of goods and services, lowering unemployment from 4% to 3.5%.
Regulatory Policies: Sometimes, the government can make it easier for businesses by reducing rules they need to follow. For example, if they lower corporate taxes from 20% to 15%, it can tempt businesses to invest more in themselves. This can lead to an increase in AS.
Overall, government intervention can effectively influence how much people want to buy and how much businesses can supply. This helps guide the economy in the right direction.
Government action is important for changing how much people want to buy (aggregate demand, or AD) and how much businesses can create (aggregate supply, or AS). Here’s how it works:
Fiscal Policy: This means how the government uses money. By changing taxes and how much they spend, they can affect AD. For example, if the government spends an extra £10 billion, it can help boost AD. This could lead to an overall increase in the economy of about £15 billion.
Monetary Policy: This is about how central banks, like the Bank of England, use interest rates. When they lower interest rates, it becomes cheaper to borrow money. For instance, if they cut the interest rate from 0.75% to 0.25%, it makes loans cheaper for people. This can encourage people to spend more money and increase AD.
Supply-Side Policies: These are steps taken to help businesses produce more. Investing in education and training can help workers do their jobs better. If workers are more skilled, it can raise the overall supply of goods and services, lowering unemployment from 4% to 3.5%.
Regulatory Policies: Sometimes, the government can make it easier for businesses by reducing rules they need to follow. For example, if they lower corporate taxes from 20% to 15%, it can tempt businesses to invest more in themselves. This can lead to an increase in AS.
Overall, government intervention can effectively influence how much people want to buy and how much businesses can supply. This helps guide the economy in the right direction.