To start with, I will explain what fiscal and monetarty policies are. Fiscal policy is the governmental use of increasing or decreasing in government spendings and/or taxation to influence the country’s economy in the way it was expected. It can be expansionary - used when economy is in recession and it is supposed to increase the AD and therefore GDP by increasing government spending and/or decreasing tax.
It can also be contractionary - used when economy is beyond the level of full employment and it is supposed to decrease the AD and therefore the inflation rate by increasing tax and/or decreasing government spending. (Dodge, 2011)
Monetary policy is the central bank’s use of increasing or decreasing the money supply or the base rate of interest to influence the level AD. It can be expansionary - used to take the economy out of recession by increasing the money supply and the interest rates and therefore increasing the AD.
It can also be contractionary - used when country is above the level of full employment to decrease the AD by an increase in the interest rate and money supply.
Whether it is fiscal or monetary policy, they are both aimed to achieve the four macro economic objectives, which are: low unemployment, price stability, high but sustainable economic growth, good balance of payments. Let’s look at the application of these policies in the real life by the government and central bank.
In 2007-2008 there was Global Financial Crisis which started in the USA because of the ‘housing bubble’ appeared because banks started giving low interest rates subprime mortgages (for people who may have some difficulties with paying their debts: low income groups, unemployed, people with bad credit history and first time borrowers) which led to the collapses of the banks all over the world and huge decreases in the values of shares on the stock markets. The crisis affected the UK economy significantly. After 2008 in the UK we can see the deteriorations in all aspects of the economy as, for instance, the decrease in the level of GDP; rocketing of the inflation rate and unemployment; and the fluctuated negative balance of trade (see Appendix 1, Figures 1,2,3 and 4). All that shows us the UK moved to the decline stagy of the economy on the economic cycle.
To solve those problems and improve the situation in the country, new fiscal and monetary were introduced in the UK. From the Budget 2008 we can see some good examples of fiscal policies implemented by the government. For instance, there was established a capital fund of £12.5m for the women who wanted to become enterpreneurs. (Darling, 2008) We concider this to be a fiscal policy because it is using the manipulations with the amounts of goverment spendings and aimiming the prosperity in one field of the macroeconomics as employment. This fiscal policy is an expansionary one because its target is to increase the agregate demand during the time of global financial recession,...