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Economics 1: Micro and Macro Theory and

Application

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Table of Contents
Task 1...............................................................................................................................................3

1.Identify one type of inflation and outline its main causes........................................................3

2.Analyse its impact of inflation on both individuals and businesses, and with reference to the
article below, assess whether inflation is a negative or positive economic condition.................4

3.Analyse the recent trends in inflation in the UK using the information provided below.
Explain the factors which have affected the rate of inflation over this time period....................5

Task 02.............................................................................................................................................6

1. Explain what is meant by the term ‘fiscal policy’................................................................6

2.Explain the aims of fiscal policy and, with reference to the following information, explain
how those aims might differ between the UK and Scottish governments...................................6

3.Evaluate the use of fiscal policy in achieving the UK government’s macroeconomic

objectives in recent years.............................................................................................................7

4.Evaluate the effectiveness of a supply-side policy of your choice, by explaining its

advantages and disadvantages in relation to its possible effect on the economy........................8

References........................................................................................................................................9

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ASSESSMENT TASKS

Task 1.

1.Identify one type of inflation and outline its main causes.

In economics, inflation is defined as a continuous increase in the pricing level through
the duration. In plenty of other word, inflation is the loss of a customer's spending power
in a currency over a long length of years.

Expansion can also be expressed as deflation. That occurs when money's spending
capacity rises while prices of goods and activities fall. Some indexes are used to estimate
inflation as a percentage. The consumer price index (CPI) and wholesale price index are
two of the most widely utilized indexes. Inflation can have both beneficial and bad
effects.

It’s depending on personal viewpoint and rate of change.

Inflation can be classified into three types. Such as “Demand Full Inflation, Cost-Push
Inflation and, Built-in Inflation”.

When it’s come to the Demand Full Inflation.

Demand full inflation is s period of inflation that arises as s result of increasing

aggregate demand. This occurs when economic growth is too fast in the economy.

PL
P1

P2

Ad1 Ad2 Y
Y1 Y2

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If aggregate demand (AD) increases greater than supply, manufacturers adjust their
product pricing to meet the demand. This may result in economic instability. Then
maybe we can argue that demands full inflation occurs as a response to surplus demand
and so more wealth pursuing a small number of products, and also it occurs when the
industry is at full capacity the jobless rate is declining, and the industry is developing at a
quicker speed.

2.Analyse its impact of inflation on both individuals and businesses, and with
reference to the article below, assess whether inflation is a negative or positive
economic condition.

Inflation is the main factor that affects both individuals and businesses. It may be a
positive impact or negative impact.

Once this comes to businesses price increases will be swift due to inflation. As a
response, firms must alter their strategy to compensate for income shortages
Furthermore, companies must spend more on raw materials and inventory. It will result
in a rise in production costs. The cost of replacing inventory is greater than the cost of
selling stock It may result in a stockpile scarcity. In addition, inflation influence on price
changes, lending, and worker pay.

Inflation is a term that can refer to either a favourable or bad macroeconomic situation
It may have a good impact on put-up pay. Employees, on the other hand, are unable to
receive salaries that are commensurate with inflation. It also benefits everybody who
takes out a credit. However, rising inflation harms the economy's growth.

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3.Analyse the recent trends in inflation in the UK using the information provided
below. Explain the factors which have affected the rate of inflation over this time
period.

Considering CPI 12-month rate in 2013 December highest inflation rate is Housing and
household services but it changed in 2014 December and take that place by restaurants
and hotel sector.

According to the study, the UK had a significant inflation rate in 2008 and 2011. It is
higher than 5%. In 2014, it drastically declined, resulting in deflation. Since the rate of
inflation is approaching zero.

As a result, we may determine that throughout this time frame costs for domestic
operations increased while prices for other items and services decreased. The hotel
business saw significant demand and high pricing in 2014, and the expenditure of that
market increased because of inflation They possess lower prices in the transportation
sector, and prices have decreased in 2014.

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Task 02
1. Explain what is meant by the term ‘fiscal policy’.
Fiscal policy is the use of the government with the collection of government income and
expenditure to influence the country’s economy.

Fiscal policy can be divided into two categories. Fiscal policy, for example, can be both
expansionary and contractionary. When the authorities try to stimulate the industry, it
lowers taxes and increases expenditures, primarily public expenditures. This will result
in a rise in GDP and growth rate. It is what becomes known as expansionary fiscal
policy. If the state wants to impede growth, it will raise taxes and cut spending on goods
and services, which is known as contractionary fiscal policy Fiscal policy relies heavily
on taxes and public spending.

Taxation and government expending are key tools of the fiscal policy.

The government controls the economy by using government spending and tax rate.
When the government going with the contractionary fiscal policy it means the economy
has a full employment level and has a high growth rate.

The fiscal policy mainly affected the government budget.

2.Explain the aims of fiscal policy and, with reference to the following information,
explain how those aims might differ between the UK and Scottish governments.

The fundamental objectives of macroeconomic policy are to preserve job growth,

minimize unemployment and achieve a strong rate of industrial growth while
maintaining price levels and wage rates stable. Also, use materials efficiently and
effectively for economic progress as well as share incomes and riches evenly.

Moreover, it helps to control inflation within the economy, lower taxation or reduce
government spending.

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To achieve these objectives the government uses expansionary or contractionary fiscal
policy. when the government wants to reduce the growth then increase the taxation and
reduce the government spending. And if the government wants to increase the growth
rate then the government will decline the tax rate and increase the government spending.
This is how government adjust the fiscal policy to achieve the goals.

In the UK and Scott government, UK introduced a new fiscal policy framework for the
Scott government which include some promises that relate with the government income
and expenditure. This mainly focus on tax policy and financial powers. But the
commission recommended that scottlend wants income tax policy and banded income
earned. So, there are different aims that different countries have. Scottlend wants power
to adjust income tax rate to achieve goals fiscal policy. Therefore, UK policies not
effectively work in the Scottlend.

3.Evaluate the use of fiscal policy in achieving the UK government’s

macroeconomic objectives in recent years.

Fiscal policy was also utilized by the UK government to attain an efficient

macroeconomic growth rate. To keep government expenditures under the limit, the UK
authority employs fiscal policy. Governments also utilize fiscal policy to control the
economy's cycle. Increasing tax rates to minimize inflationary impact is proving
politically challenging in the United Kingdom. Automated fiscal stabilisers, on the other
hand, perform a critical part in the development and maintenance of the macroeconomic
cyclical in the United Kingdom.
Whenever there is a downturn, the government receives lesser tax revenue and spends
more on jobless benefits In addition, the state may engage in contractionary fiscal policy
in rare situations For instance, after a harsh downturn in 2009, the government decreased
the Tax rates in an attempt to encourage industrial activity As a consequence, debt has
climbed to more than 10% of GDP. The UK is facing numerous challenges and risks as
a result of the global crisis. Because of the pandemic, they will have to increase their

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government expenditure. Since the beginning of, the downturn they have spent GBP 49
billion to maintain public services. They believe that fiscal policy has cost GBP 184
billion since March (2019).

4.Evaluate the effectiveness of a supply-side policy of your choice, by explaining its

advantages and disadvantages in relation to its possible effect on the economy.

Supply-side policies boost output which supports development in the economy as well
as the state tries to boost efficiency while improving the economy's efficiency. After
then, the AD curve shifts to the right. Labour, investment, innovation, and property are
the factors that govern the achievement of objectives. The goal of supply-side policy is
to improve the business environment. In this policy, they employ tax reduction and
privatization as tactics. As a result of this strategy, businesses will be able to recruit
extra laborers. The latter curve is a diagram that depicts supply-side economics.

Business tax breaks will raise the amount of cash available to recruit employees to spend
in capital infrastructure and improve the number of products and services produced as a
result of this legislation. All this benefits the firm by providing opportunities for it to
grow. As a result, the cost of compliance would be reduced.

Supply-side policies can be divided into two categories. Expansionist supply side
strategies versus free-trade supply-side policies. That result in reduced inflation, reduced
joblessness increased development and improved balance-of-payments transactions.

The opposite of supply-side policy is demand-driven Keynesian theory.

And there are some limitations of this policy. There is a government limits that can
accelerate the growth of technological change and improvement of working practices.
And there may be supply-side policies that can be counterproductive. And, in recession
cannot tackle fundamental problems a like lack of aggregate demand.

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 So, we can conclude that there is negative and positive impact regarding the supply-side
policy.

References
.D.Huang, K. X., November 2005. Inflation targeting: What inflation rate to target. Journal of
Monetary Economics, 52(8), pp. 1435-1462.
Easterly, W. & Rebelo, S., December 1993. Fiscal policy and economic growthAn empirical
investigation. Journal of Monetary Economics, 32(3), pp. 417-458.
Sawyer, M., June 2011. UK Fiscal Policy After the Global Financial Crisis. Contributions to
Political Economy, 30(1), pp. 13-29.
Zagler, M. & Dürnecker, G., June 2003. Fiscal Policy and Economic Growth. Journal of
Economic Surveys, 17(3), pp. 397-418.