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Macroeconomics of the UK - Essay Example

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Macroeconomics of the UK

Macroeconomics is the big picture of a country. The rate of inflation measured by the Consumer price index, Growth measured by the GDP rate, and the rate of unemployment, which denotes the country's full employment potential. On the other hand, Microeconomics is study of the behavior of firms workers, markets and households. The primary goal of the government and the Bank of England is to keep inflation and unemployment as low as possible in the process of maximizing growth. To achieve this goal a monetary and fiscal policy is formulated. A monetary policy is the altering of lending rates to banks this in turn releases or curbs money supply in the financial market. An increase in the prime lending rate by the Bank of England to other banks pushes them to raise the interest paid on deposits to consumers and the interest on loan to borrowers. A fiscal policy is the change in the taxation structure and public spending. Public spending in other words is the government spending on defense, infrastructure and welfare schemes for the country. (Source:Mathew Bishop 'Economist' Essentials of Economics, Macroeconomic policy.)
Inflation is caused when demand for goods and services exceed supply or a rise in the price of oil, which most countries around the globe are facing right now. An increase in the prime lending rate will encourage saving, and discourage borrowing due to the high rate of interest on loans and in turn bring down consumption spending by giving the common person, lower disposable income, Therefore lower demand and this controls price rise. Now the reduction in consumption spending decreases the demand for goods and services, and businesses will cut cost as they worry about inventory pile up and future sales. This results in low wages and unemployment. So what do we do What we see here is ironical. In the attempts to curb one aspect of macroeconomics- Inflation, we end up in the deterioration of the other two, growth and employment. Do economic policies offer salvation

Most of the time it is difficult to predict the trends in the economy after any change in policy. The changes are time lagged and may not occur as early as expected or sometimes may even skip stages in the cycle. What we clearly know is the balance that should be maintained in order the ensure stability and growth. Spending power needs to increase for demand creation and the facilitation of industrial growth.

A change in the fiscal policy can also help neutralize downward economy by leaving more disposable income in the hands of the consumer. However, this is again a balance to be maintained by the careful blending of monetary and fiscal policies .Global factors, local factors, and all aspects of microeconomics play a key role. Definitely, inflation or deflation can never be zeroed down or always be maintained at the targeted rate. It can only be brought close to the targeted rate and with the best efforts of the bank and government contained within a desirable range. However, one should not ignore the fact that a bad macroeconomic policy can push a country into recession.
















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The current Macroeconomic situation in UK.

The major threats for the UK economy is the growing Inflation and the ...Show more

Summary

The aim of the paper is to understand and analyze the Macroeconomic theory in coherence with the current macroeconomic conditions prevailing in the UK. The paper will illustrate the determinants of macro economy and the role they play in making policy and interest rate decisions…
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Macroeconomics of the UK essay example
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