Economics Essay Sample

Introduction of Economics Essay Sample

Demand management policy implies for the various measures and strategies that have been undertaken with the aim of controlling the overall consumption level of product and services. The main motive behind initiating this policy is to stabilize the economy and controlling inflation within the country. The four major demand management policies include fiscal, monetary, trade and foreign policy. The current essay will include the evaluation of the statement ‘through demand management policies, the government does more harm than good’. In order to evaluate research topic current demand control policies of UK will also be discussed. It also depicts the various innovation and changes that has been introduced in macroeconomics policy for effectively managing the demand.

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Main Body

Each country aims at managing the overall demand and supply with the motive of balancing economic status of country. For managing aggregate demand and supply, government intervention has been initiated. These government interventions are in the form of monetary, fiscal, trade and foreign policy that helps in controlling the situation of inflation and deflation. Monetary policy of the country refers to the set of activities undertaken with the aim of controlling money supply within the economy (Chishti et al, 2021). Bank rate, repo rate, reverses repo rate, open market operation, moral suasion and Legal and cash reserve ratios are various measures of monetary policy. This measures has been treated as optimum as it will help in reducing inflation/deflation within country by managing the overall demand. However, this policy has not recognised effective and accurate as there are large number of negative impact than the positive. Voluntary reserve ratio indicates the amount of money that could not be lend to others and needs to save as a reserve. This has initiated with the aim of controlling the money flow in control and reducing inflation. It has identified that currently over 12% of voluntary reserve needs to be maintained by UK’s bank. However, this policy has hampered the economic growth and development within country due to the reduction in money within the country. Davies et al, (2021) stated that this restriction in the flow of money in economy results into reduction in the purchasing power for the individual that eventually leads to decreasing price of the goods and services which is negative indicator for the suppliers. Due to reduction in the price of goods and services, producers are unable to cover the cost of production and did not earn an effective amount of revenue which eventually results into shutting down businesses within the country. Moreover, it has identified that Bank rate is another policy that includes the rate at which the bank of England, lend money to other financial institution. There is a reduction in UK’s bank rate with the aim of encouraging money supply within the country which amounted to 5%. Reduction in bank rate helps in economic growth and development as household and firm are able to get loan at less interest (UK’s monetary policy, 2024). Further it has identified that there is an increase in the reverse repo rate which promotes saving by the country’s individual (Davies et al, 2020). However, continuous decrease in the bank’s rate and increase in saving rate result in creating a situation of liquidity trap that create negative impact on the overall economic status of the country. Liquidly trap is the situation in which country’s population stop spending money for the development purpose and focuses on saving the money that create the situation of recession. Further, the monetary policies have resulted in creating a situation of deflation which seems very difficult to control. This demand management policy also leads decline in the efficiency of expansionary monetary policy that results in reducing production and negatively impacting on country’s economy. Fiscal policy is another demand management policy that has been initiated by UK’s government. This policy concentrates on using government’s taxation and spending with the aim of influencing economy. It has identified that government spending in UK has reduced with the aim of managing overall demand. There is 1.5% reduction in the government expenditure in the year of 2023 as compared to the previous year (Fiscal policy of UK, 2023). This has created positive impact on country as the prices of goods and services reduced which result in controlling the inflation (Jamal et al, 2019). On the other hand, this policy leads to increase the unemployment cases within economic that result in rise in poverty in UK. Due to the lack of government spending, there is a negative impact on the economic growth that further leads decline in the employment opportunity and eventually result into reduction in the purchasing power of country’s population. Further, there is depletion in the infrastructural development within the country as government expenses towards improving healthcare systems, transportation has been reduced. Additionally, this contractionary fiscal policy has resulted into incline in the interest rate within the country that restrict individual to borrow for growth and development purpose. This has also resulted in currency appreciation and thereby makes imports more attractive. There is an increase in the import and the demand for the local goods and services get down which creates issue for the country in maintaining the competitiveness (Jiang, Van Fan and Klemeš, 2021). Local businesses are negatively impacted as the firm needs to cut down the cost of their product for attracting the customers which further reduces their overall profitability. The second element of the fiscal policy includes modification in the tax rates which helps in increasing government profit and balancing economic situation of UK. It has identified that there is a high tax rate in UK that amount to 40% in year 2023 (Tax rate in UK, 2023). Government has initiated this with the aim of reducing inflation as high income tax which will result into reduction in the money power of consumer and decreases aggregate demand within the country. However, the poor section of the country has faced issue in acquiring the necessities. The medium and small sized businesses are unable to maintain their profitability as high tax rate has reduced their profits. Many economists have argued that an increase in tax rate puts negative impact on the unemployment rate. Moreover, rise in the labour cost eventually leads decreasing demand for the labour (Keum et al, 2020). It has identified that tax rate get increased with the view of managing inflation. In addition to this, tax rate will help in decreasing the overall purchasing power of the individual and result into controlling the level of inflation. However, this has rather created opposite circumstances as increase in tax rate reduces overall productivity and GDP in the country. As per theory of aggregate demand (AD) and supply (AS) reduction in production with little change in AD for the necessity goods, the price is tend to rise. This has also resulted in creating the deteriorating economic circumstances and impact on overall growth and development of the country. The foreign or exchange rate policy is the third measures that are used by the government with the aim of managing demand within the country. Exchange rates of the country are managed with the view of controlling the overall demand that will aid in stabilising the economic performance. For balancing the exchange rate, the government is involved towards changing the exports and import status of the country and also initiate purchase and sell of foreign currency. It has identified that UK has faced high inflation and resultant in the devaluation of the country’s currency. Consequently, concerned situation leads reducing imports and high exports (Littlejohns et al, 2020). For avoiding such situation, UK’s government has focused on appreciating the country’s currency which will help in managing overall inflation within the country. For appreciating the currency, government has increased the interest rate, sell out foreign currency and reduces the level of production in the market. This currency appreciation promotes more imports as individual will be able to purchase high quality goods at the lower prices. This will result in reducing demand for the local goods that eventually contributes towards managing the inflation. However, this policy has created the negative impact on local businesses of the country. The reduction in exports creates a situation of trade deficit in the country and ultimately results into high debt. High amount of import creates difficulty for the local businesses to sell it product at effective prices results in reducing overall profitability of the business entity. The last policy for controlling and managing demand within the country is related to the trade policy. This policy has been initiated with the aim of managing export and imports within the country with the motive to stabilize the economic growth of the country. The two trade policies which generally adopted are related to free trade and protectionism (Mummolo and Peterson, 2019). Free trade policy includes avoiding all the type of restriction as to promote import and exports. Protection policy refers to putting restriction on trade so that domestic companies could be prevented from international companies. UK’s Government is using free trade policy from the longer period of time so that domestic producer has excess to large market area and enhances choices for country’s population. Demand constraint is occurring due to the limited resources and never ending needs. With the free flow trade agreement, the constraints of limited resources have been overcome as the number of goods and services get enhanced which results in ultimately managing overall demand. This policy created the positive impact on overall country’s economic but the local producers are not gaining effective benefit from this (Reicher and Stott, 2020). Due to the free flow of goods and services there is a rise in number of competitors in the industry which creates difficulty in creating or gaining competitive edge. Firm needs to sell their product at low cost a customer’s purchasing power has increased. This reduces the profitability of many small businesses and leads to shutting down the large number of organization. After analysing the limitation that has occurred due to demand controlled policy, there are various changes that has introduced in such policy. It has identified that monetary policy of UK has promotes deflation in the country which is resulting in slowing down economic growth and development. To overcome the issue, government has initiated measures such as reducing the interest rate and increasing the prices of bonds (Summers and Rachel, 2019). This policy has been initiated as reducing in interest rate promotes higher borrowing by the individual and result in more capital formation. Further the ratio of voluntary reserve has also reduced to 8% to 10% that helps in increasing multiplier effect within the economy and support in enhancing earning of the banks which results in economic growth. There are various crucial changes that has introduced in the fiscal policy of the country, increase in government spending is one of the measures. In year 2024, UK’s government has planned to increase the spending by 3.5 billion pound that helps in creating more employment opportunity within the country (Government spending in UK, 2024). Authority has focused over maintaining a balance between the employment rate and the inflation so that demand could be effectively controlled while providing high employment opportunity to country’s population. Additionally, the tax rate in UK is increasing drastically due to which government has formulated policies through which tax rate has been reduced to 340 pound for an average earners. This strategy support in promoting production within country as less tax rate boost investment and saving and also support in decreasing overall unemployment within country. Further this policy help in increasing purchasing power of the consumer and assists in enhancing gross domestic product of the country. UK’s government has also emphasis over maintaining spectrum of trade policies as free flow of trade has resulted in creating issues for domestic producers.

Conclusion

By summing up the report, it has identified that monetary policy, trade policy, foreign policy and fiscal policy has been initiated in UK with the aim of managing demand within country. This policy has supported in managing country’s economy but has created various negative impacts on growth and development. The monetary policy of UK has increased deflation as there is increase in reverse repo rate and voluntary reserve that reduces expenditure. Further the increase in tax and reduction government spending has leads to increasing unemployment within country. The free flow of trade and the currency appreciation has resulted in creating a situation of high imports which reduces country’s growth. For overcoming this, the UK’s government has focused on increasing expenditure, reducing bank rate and balancing free flow policy so that demand could be controlled while managing economic growth.

References

Books and Journal

• Chishti, M.Z., Ahmad, M., Rehman, A. and Khan, M.K., 2021. Mitigations pathways towards sustainable development: assessing the influence of fiscal and monetary policies on carbon emissions in BRICS economies. Journal of Cleaner Production, 292, p.126035.
• Davies, N.G., Abbott, S., Barnard, R.C., Jarvis, C.I., Kucharski, A.J., Munday, J.D., Pearson, C.A., Russell, T.W., Tully, D.C., Washburne, A.D. and Wenseleers, T., 2021. Estimated transmissibility and impact of SARS-CoV-2 lineage B. 1.1. 7 in England. Science, 372(6538), p.eabg3055.
• Davies, N.G., Kucharski, A.J., Eggo, R.M., Gimma, A., Edmunds, W.J., Jombart, T., O'Reilly, K., Endo, A., Hellewell, J., Nightingale, E.S. and Quilty, B.J., 2020. Effects of non-pharmaceutical interventions on COVID-19 cases, deaths, and demand for hospital services in the UK: a modelling study. The Lancet Public Health, 5(7), pp.e375-e385.
• Jamal, M.T., Abdulrahman, I.A., Al Harbi, M. and Chithambaran, S., 2019. Probiotics as alternative control measures in shrimp aquaculture: A review. Journal of Applied Biology & Biotechnology, 7(3), pp.69-77.
• Jiang, P., Van Fan, Y. and Klemeš, J.J., 2021. Impacts of COVID-19 on energy demand and consumption: Challenges, lessons and emerging opportunities. Applied energy, 285, p.116441.
• Keum, D.H., Kim, S.K., Koo, J., Lee, G.H., Jeon, C., Mok, J.W., Mun, B.H., Lee, K.J., Kamrani, E., Joo, C.K. and Shin, S., 2020. Wireless smart contact lens for diabetic diagnosis and therapy. Science advances, 6(17), p.eaba3252.
• Littlejohns, T.J., Holliday, J., Gibson, L.M., Garratt, S., Oesingmann, N., Alfaro-Almagro, F., Bell, J.D., Boultwood, C., Collins, R., Conroy, M.C. and Crabtree, N., 2020. The UK Biobank imaging enhancement of 100,000 participants: rationale, data collection, management and future directions. Nature communications, 11(1), p.2624.
• Mummolo, J. and Peterson, E., 2019. Demand effects in survey experiments: An empirical assessment. American Political Science Review, 113(2), pp.517-529.
• Reicher, S. and Stott, C., 2020. On order and disorder during the COVID‐19 pandemic. British Journal of Social Psychology, 59(3), pp.694-702.
• Summers, L.H. and Rachel, L., 2019, March. On falling neutral real rates, fiscal policy and the risk of secular stagnation. In Brookings Papers on Economic Activity BPEA Conference Drafts, March (Vol. 7, p. 66).

Author Bio

Zoe Turner   8 Years | PhD

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