Macro-economic policy is designed to achieve the aims of full employment, stable prices and sustainable development. In order to achieve them, policies and targets are set by governments. These policies are mainly monetary and fiscal. In this essay, I will examine the aims and policy objectives which UK governments have pursued from the credit crunch of 2008 up to the present time. The credit crunch in 2008 was caused by irresponsible mortgage lending by banks. High-risk loans were made to people who were at considerable risk of not being able to repay them. These loans were then packaged together and sold on in to the investment market. Investors bought the safer tranches because they trusted the triple-A credit ratings assigned by …show more content…
The stock market had a frantic time in the month from September 29th 2008, as shares decreased hugely in value. The economy was pushed in to recession. How did the UK government response to this global crisis? From 2007 to 2010 the Labour government was in power. Gordon Brown was the PM and Alistair Darling the Chancellor of the Exchequer. The labour government applied Keynesian economic theory to stimulate the economy. This would allow citizens to have more money to spend and help generate economy recovery. Interest rates were a key weapon in the fight. Between May 2008 and April 2009 UK bank base rate was reduced from 5% to 0.5% (where it has remained ever since). The government wanted to encourage the population to spend more by reducing the cost of borrowing. Between March and November 2009 the bank of England purchased £200 billion of financial assets from UK banks, using newly created money . This so-called “quantitative easing” was designed to give banks more money to inject in to the economy. The Labour government also applied fiscal policy to the problem. They continued to run a large budget deficit. They also applied fiscal stimulus. In particular, they cut VAT in November 2008 to give the population more money to spend. The Labour government also effectively nationalised two major UK banks (HBOS and Royal Bank of Scotland) after their discovered how vulnerable these banks had
In the views of the politicians, the economy was not one of a ‘Golden Age’. As the British Cabinet Paper wrote, ‘It is clear that ever since the end of the war we have tried to do too much…we have only rarely been free from danger of economic crisis’. This illustrates the fact that although the economy was not falling apart, it was not stable and not prosperous. There was also a lack of a plan to deal with the economy; the government merely adjusted the system as it went along, which sometimes resulted in high rises of inflation or sudden consumer booms that did not correlate with its ability to pay for them – causing a deficit.
Due to the 2008 financial crisis, the Bank of England employed quantitative easing (an unconventional monetary policy used to stimulate the economy) by cutting interest rates down to 0.5 % and has been keeping it until now. The Bank made the decision to keep QE and the interest rate unchanged in March. Spare capacity (the ability of a firm to produce more of a product than is now being produced) is used by the BoE to justify its use of forward guidance policy (a communicative tool for monetary policy). Low interest rates improved the economy by increasing consumption and investment, which are the components of AD. The AD curve shows the total spending on goods and services in a period of time at a given price level. In constructing on AD
Max: Now that we have taken care of fiscal policy we must acknowledge the second half of the efforts to pull ourselves out of the recession. Monetary policy! Monetary policy is the action of the federal Bank of the United States of America to manipulate the economy using the three tools. The three tools are open market operations, discount rate, and reserve requirements. The most commonly used tool is OMO’s, the fed buys bonds from the federal government and then sell to the public. With the profit they make from the bonds sold to the public they buy more bonds. And then it continues in this cycle.
Our economy is a machine that is ran by humans. A machine can only be as good as the person who makes it. This makes our economy susceptible to human error. A couple years ago the United States faced one of the greatest financial crisis since the Great Depression, which was the Great Recession. The Great Recession was a severe economic downturn that occurred in 2008 following the burst of the housing market. The government tried passing bills to see if anything would help it from becoming another Great Depression. Trying to aid the government was the Federal Reserve. The Federal Reserve went through a couple strategies in order to help the economy recover. The Federal Reserve provided three major strategies to start moving the economy in a better direction. The first strategy was primarily focused on the central bank’s role of the lender of last resort. The second strategy was meant to provide provision of liquidity directly to borrowers and investors in key credit markets. The last strategy was for the Federal Reserve to expand its open market operations to support the credit markets still working, as well as trying to push long term interest rates down. Since time has passed on since the Great Recession it has been a long road. In this essay we will take a time to reflect on these strategies to see how they helped.
The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’
“Since 2007 to mid 2009, global financial markets and systems have been in the grip of the worst financial crisis since the depression era of the late 1920s. Major Banks in the U.S., the U.K. and Europe have collapsed and been bailed out by state aid”. (Valdez and Molyneux, 2010) Identify the main macroeconomic and microeconomic causes that resulted in the above-mentioned crisis and make an assessment of the success or otherwise of the actions taken by the U.K government to resolve the problem.
UK government was very swift in its response the financial crisis. Various measures were taken to address the economic anomaly that came with the crisis. These range from various monetary policies to fiscal policies. Some of these policies are discussed below:
The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.
In response to this slump, the Government tried to stabilise the British economy by reintroducing the
The “Great Recession” is commonly used to explain the massive economic contraction that occurred in the United States during the fourth quarter of 2007. However, the actions of the United States spanned to other nations, leaving massive effect on the global economy. One nation that took on serious financial burden during this recession was the United Kingdom. This nation first faced the effects of the Great Recession beginning in the first quarter of 2008. Overall, the initial mass effects on the nation can be attributed to the nation’s reliance on the financial sector. In fact, after partially stabilizing in 2009, the country struggled with a double-dip recession between 2010-12, and continues to struggle with some of these effects.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects
The Financial Crisis of 2007 followed by a period of recession has had a powerful effect on the UK financial sector, which has faced a high number of job losses, pushing the amount of people employed in this sector below pre-recession levels. Alongside multiple countries, England saw a rise in unemployment to some of its highest recorded levels. However, in recent years, the employment rate has reached 75% in Sep 2017 (Clegg, 2017), which for the first time since 2008 is an increase upon the pre-recession employment rate. Within this essay I am going to analyse the current situation in the
The economic reforms initiated by Prime Minister Margret Thatcher since 1980’s has made the United Kingdom record steady economic growth in the 1990s. However, successive Labour governments increased government spending significantly. Since 2010, the government upheld austerity as the principal of its economic policy. In 2014, the country recorded its strongest economic growth since 2007 of 2.387 trillion dollars with GDP per capita at 39,350.64 dollars. The GDP increased significantly because of the enhanced performance of the construction, manufacturing, and services sectors. Retail sales also increased with unemployment relatively at lowest
The economy was in a relatively stable position, inflation (4%) and unemployment (1.4%) both moderately low. Productivity growth (4%) was respectable though still below competitors. Nonetheless, there was what seemed to be a persistent problem by now, a balance of payments issue, which had big impacts on the economy. Labour inherited a current account deficit of some £800m. The causes of this substantial deficit were ascribed to a loss of price competitiveness. The change in dynamics of the market had also differed. Britain’s manufacturers found it easy to export and oppose importing in the 1950s as they faced a sellers’ market. Though now, industrialised countries had become more competitive and led to new competition in foreign markets. Improvements in the balance of payments should have been the primary target. However, labour had a greater emphasis on controlling prices in order to restore competitiveness. There was a
After the Global Financial crises of 2008, UK economy was severely affected and had dipped into recession. Thus, this led to a fall in market confidence, lower GDP growth and higher levels of unemployment. In order to boost the economy, expansionary monetary policies were adopted by the Bank of England. Interest Rates were cut to historic low of 0.5%. However, the economy was still not out of recession and conventional monetary policies failed to work even when interest rates were near zero bound. So, the central bank used unconventional monetary tools such as Quantitative Easing i.e. buying government bonds and injecting money into the economy. This policy was accompanied by a rather new policy known as the Forward Guidance in August,