MCRO ECONOMICS

Submitted To:
Sir. Zaigam

Submitted By:
Adeel Yaseen
BBA 02093005

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 ACKNOWLEDGEMENT

All praises belong to almighty ALLAH who is the Supreme Authority

knows the ultimate relations underlying all sorts of phenomenon going

on in this universe and whose blessing and exaltation flourished my

thoughts and thrive my ambitious to have the cherished fruit of our

modest efforts in the form of searching on this project. I also offer our

humblest thanks to HOLY PROPHET HAZRAT MUHAMMAD (PBUH) who

is the forever torch of guidance and knowledge for humanity as a

whole.

I deem it our utmost pleasure to avail this opportunity to express

gratitude and deep sense of obligation to my Sir. Zaigam for his

valuable and dexterous guidance, scholarly criticism, untiring help,

compassionate attitude, kind behavior and moral support.

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What is the difference Between Monetary and Fiscal Policy?

 Monetary policy involves changing the interest rate and influencing the money supply.
 Fiscal policy involves the government changing tax rates and levels of government
spending to influence aggregate demand in the economy.

They are both used to pursue policies of higher economic growth or controlling inflation.

Monetary Policy

Monetary policy is usually carried out by the Central Bank / Monetary authorities and involves:

 Setting base interest rates (e.g. Bank of England in UK and Federal Reserve in US)
 Influencing the supply of money. E.g. Policy of quantitative easing to increase the supply
of money.

Fiscal Policy

Fiscal Policy is carried out by the government and involves changing:

 Level of government spending

 Levels of taxation

1. To increase demand and economic growth, the government will cut tax and increase
spending (leading to a higher budget deficit)
2. To reduce demand and reduce inflation, the government can increase tax rates and cut
spending (leading to a smaller budget deficit)

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Describe the difference between monetary and fiscal policy in the UK and
explain how such policies can be used to achieve different macroeconomic
government objectives.

As I define before that the main and most obvious difference between monetary and fiscal policy
is that monetary policy is set by the central bank and fiscal policy is implemented by the
government. In the case of the UK, monetary policy is decided upon by the Bank of England
which since 1997 has been independent from the government. It would be worth considering the
two types of economic policy in more detail now before turning to look at how they can be used
to help meet macroeconomic government objectives.

Monetary policy is the attempt to control macroeconomic variables through the setting of interest
rates. It is a rather blunt policy tool as its effects can be felt throughout the economy as a whole.
By changing interest rates, the Bank of England is trying to influence the overall expenditure in
the economy as well as controlling inflation. Reducing interest rates makes borrowing the more
attractive alternative to saving which then leads to more spending in the economy. Lowering
interest rates can also make assets such as property increase in value which also leads to more
spending as homeowners extend mortgages and consume more. By cutting interest rates, it is
hoped that this increased spending feeds through to output and then to employment. Increasing
interest rates on the other hand, has the opposite effect by making saving more attractive than
spending and therefore overall spending in the economy is reduced.

Fiscal policy is controlled by central government. It can be defined as a government’s program

with respect to

 The purchase of goods and services and spending on transfer payments.

 The amount and type of tax.

It involved the government changing levels of taxation and spending in order to influence the
level of aggregate demand (AD). The purpose of fiscal policy is to reduce inflation, stimulate
economic growth and to stabilize this growth and avoid periods of ‘boom and bust’. If monetary
policy is described as a blunt instrument then fiscal policy is a precision tool that can target

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particular sectors of the economy and population in order to achieve the desired economic
changes.

Both these different types of policy are working towards achieving different macroeconomic
objectives. It would be worth looking at these in greater detail now. There are four major
macroeconomic objectives that any economic policy should be working to achieve.

These are given below.

 Full employment
 Price stability
 Sustainable economic growth
 Keeping the Balance of Payments in equilibrium

These four different objectives compete with each other and all achieve different levels of
importance depending on the priorities of the government.

In 2007/2008 the UK government showed a deficit of £38.7 billion which is around 2.7% of
gross domestic product (GDP). The general government debt is around £614.4 billion which is
around 43.2% of GDP (ONS, 2008).The current rate of employment stands at 74.1% (ONS,
2009) which is a slight decrease on the previous year. However, as the recession deepens, it is
expected that this number will fall even further.

Perhaps the most two important objectives for the government at present are sustained economic
growth and price stability by keeping inflation low. The government is trying to foster
sustainable growth in the economy which means growth without inflation. However, the past
year has seen the UK economy slip in to a recession, making any sort of growth impossible.
During this recession the level of inflation has fallen but this has not translated into economic
growth. It was hoped that that low inflation would mean that spending would increase. This
essay will now turn to look at how the use of monetary and fiscal policy can be used to achieve
these macroeconomic objectives.

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The Monetary Policy Committee is now tasked with maintaining price stability and also
supporting the government in meeting its objectives for growth and employment .The
government still sets the goals of monetary policy but it is up to the Bank of England to decide
how best to achieve this through. The final argument for having an independent central bank is
that countries that have them tend to have lower levels of inflation.

Beyond cutting interest rates and printing there is little more that monetary policy can offer to
delivering macroeconomic objectives. This essay will now look at how fiscal policy delivers
macroeconomic objectives.

Fiscal policy can be finer tuned to target particular sectors of the economy and the population. It
does not take the rather blanket approach taken by monetary policy. Perhaps the most effective
fiscal policy to achieving macroeconomic objectives is through borrowing and taxation.

Example:

The government recently cut the lower starting rate of income tax. This encourages people on
lower incomes to work more hours because they will be able to keep more of what they earn.
This they can either spend or save, based on the level of inflation that is determined by monetary
policy.

It could be argued that fiscal policy is not as much use as monetary policy to meeting
macroeconomic objectives at the present time. The government is trying to stimulate spending in
the economy by borrowing more money in order to fund tax cuts and increased spending in
social programs. However, the effect of this may be that people are realizing that they may face a
higher tax burden in the future because of this increased spending and so are saving more in
anticipation of this.

With the global economic situation seemingly changing on an almost daily basis, it is hard to
judge just how effective monetary and fiscal policies are in meeting macroeconomic objectives.
It is also hard to judge which the most effective way of delivering these objectives is. This essay
would argue that both policies are fairly weak at the moment. In order for monetary policy to
work, it requires people to have the confidence to spend knowing that money is always going to

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be available to them. This could be just a person buying goods in the high street or a business
buying services from another business. It would seem that UK consumers are willing to hold on
to large quantities of money, even though the central bank has lowered interest rates to such an
extent that it makes saving a very unattractive option. Consumer confidence is low, and when it
is low people tend to hold on to their money rather than borrowing more. It remains to see just
how effective this quantitative easing will be.

In many ways it seems that fiscal policy is working against monetary policy at present in
achieving macroeconomic objectives. While on the surface it seems logical for the government
to be borrowing big in order to fund tax cuts and create jobs, many people see this borrowing as
storing up problems for the future because all this borrowed money will have to be repaid at
some point. This means that people are saving more instead of spending which the government
wants us to do to meet the objective of growth in the economy.

HOW ENTREPRENEURS IMPACT AN ECONOMY

Introduction

As economies continue to integrate due to globalization and officially closed economies like
India and China march toward total liberalization, entrepreneurship is on the increase. A close
analysis of developed and industrialized economies indicates a common denominator that stands
out amongst all of them, which the important role is played by entrepreneurship and
entrepreneurs in such economies. This phenomenon has proved to us that if an economy is to
develop fully, entrepreneurship should be allowed to thrive.

Objective

 Critically analyze the impact of entrepreneurs in any given economy.

Innovation

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Individuals often resort to entrepreneurship for one of the following reasons, because they find a
market place and have the solution to profit from such place, because they have been unable to
find suitable employment or a suitable means of income and therefore have resorted to using
their creativity to generate an income for themselves, or because they have the technological
know-how and the financial resources (or able to source all of the above) necessary to generate
income by satisfying a need in the marketplace. Irrespective of which of the above led an
individual to become an entrepreneur it is clear that innovation and creativity is the driving factor
and therefore it can be stated that the biggest impact of entrepreneurs to an economy is the
innovative contribution that they make.

Job Creation

As stated in the previous section one of the main reasons that individuals tend to become
entrepreneurs is because they are unable to find suitable jobs. As a result, by being enterprising,
creative and finding a market place, not only are they able to generate an income for themselves
but also to employ other individuals in their business operations. Therefore one of the most
positive impacts that entrepreneurs make on an economy is job creation and the reduction of
unemployment levels within that economy. In developed countries we see that almost 40 – 50%
of the workforces are employed in small and medium scale business enterprises that were started
up by very enterprising individuals. Likewise in countries like India we see that millions of
women have been able to pull their families out of poverty through self employment and
entrepreneurship that has been made possible by different Non Governmental Organizations.
Africa is another good example of small scale entrepreneurs helping to reduce poverty and help
many avoid destitution. Therefore based on everything that has been stated above it is clear that
entrepreneurs can cause a great degree of impact on an economy through job creation and
income generation.

Increased Competition

 As new entrepreneurs join the fray in existing domestic markets.

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  While one may venture to say that this will only lead to market saturation, the upside of
such a phenomenon is that it causes all the players in the market to re-evaluate their
operational capabilities, increase value addition, lower costs and become more efficient.
 Competition reduces likelihood of monopolies and oligopolies in the marketplace and is
beneficial to the customer and the economy as a whole.

Increased Productivity

 Use resources more efficiently and most importantly reduce costs while adding value. All
this often results in an increase in productivity in an economy and an increase in the gross
domestic product (GDP), which is indeed a benefit for the economy. It is the opinion that
increased productivity which can then lead to increased unemployment will then cause
more individuals to be creative, find position markets, become entrepreneurs and begin
generating more employment opportunities, thus re-inventing the wheel and driving the
economy forward.

New Markets

As stated in the previous section increased competition in the marketplace can cause saturation
and as a result many entrepreneurs maybe driven to seek new markets for their products and
services or adapt market penetration strategy. Either way such a phenomena of increased
competition, which ultimately causes individuals to look for new markets can be considered as a
positive impact on the economy and therefore entrepreneurs can be considered to play a very
important role in the economy. As integration of economies continues due to globalization
entrepreneurs often be likely to look for markets that are outside of their domestic area thus
generating foreign revenue and increasing the prosperity of the economy as a whole. While this
may be a very simplistic explanation of the impact that entrepreneurs make on an economy, it is
also safe to say that the employment generation, increased competition, market expansion,
market penetration and sourcing new markets all result in income generation that finally help an
economy to become more successful, draw millions out of poverty and generate funds for social
welfare activities that ultimately uplift the living standards of its citizenry.

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Negative Impacts of Entrepreneurs

 The single largest negative impact of entrepreneurs on an economy is the plundering of

resources, which can have a disastrous affect on the environment.

Positive impacts of entrepreneurs

 Job creation

 Reduction in unemployment levels

 Increased competition

 Opening new markets

 Increasing productivity

 Foreign income generation

 Poverty alleviation

Conclusion

So the conclusion of this argue based on everything that has been discussed above it is clear that
the positive impacts of entrepreneurs on an economy far outweigh the negative impacts. Job
creation, reduction in unemployment levels, increased competition, opening new markets,
increasing productivity, foreign income generation and poverty alleviation are some of the
positive impacts that entrepreneurs have on an economy. However this is not to say that there are
no negative impacts such as the wastage and plundering of resources, yet taken as a whole it is
clear that the entrepreneurs positively impact an economy.

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Reich (2010, p. 1)

Introduction

Argues that economic growth leads to increased prosperity in the developed, emerging and
developing world. The argument is focused on the negative effects of slow economic growth for
the world and the environment. This piece of writing provides a unique side regarding the impact
of growth on environment and approves of economic growth as an indicator of improving
environmental and economic conditions of people throughout the globe. This essay provides a
critique of the argument made by the writer in support of economic growth.

Critical Review of the object

The importance of economic growth should be considered in situation of the impact of growth on
environment. It is observed that economic growth tends to negatively impact the environment
during its initial phase but growth leads to positive outcomes over the long-term. The focus of
governments is to first improve the economic comfort of their citizens and as the economic
conditions improve the regulatory authorities direct their attention towards improvement of the
environmental conditions. This piece of writing correctly suggests that the negative impact of
growth on the environment is the result of inadequate and poor implementation of international
law regarding the protection of environment.

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The economic growth resulted in widespread damage to the environment in the developed world
including the United States, Japan and the Western Europe during its initial phase; however, the
introduction of strict environment regulation in these regions has improved the environmental
impact of growth. The spread of education across the developed world has also raised awareness
regarding the need for environmental protection and businesses have responded to consumer
awareness by becoming increasingly concerned about their path on the environment. The
consumers in developed world are not willing to purchase goods and services from businesses
that fail to display corporate responsibility towards the environment. This does not imply that the
negative impact of growth on the environment has reversed but there is substantial effort from
the business community to develop processes and technologies that can result in a reduction in
the carbon productions produced by the business in order to support sustainable growth.
Therefore, the piece of writing rightly suggests that government improve environmental laws
after the population has reached a certain minimum standard of living based on economic terms.

The unprecedented economic growth over the past three decades has resulted in severe
consequences for environment due to the carbon path of business on the surroundings. The
growth of the airline industry has offered several benefits but at the expense of the environment
due to the carbon emissions in the air. The airline industry is trying to reduce its carbon path but
growth does imply increase in the demand for travel and increase in the overall emissions. This
implies that even when businesses aim to be socially responsible growth continues to have a
negative impact on the environment. It is also argued that economic growth automatically slows
down in response to strict international law for the preservation of the environment. It is argued
that economic growth should be maintained at sustainable levels and unmonitored economic
growth does not lead to benefits to the society. Therefore, the focus of the economies and
business frameworks should be diverted to the adoption of growth strategies that create a
sustainable environment.

The critical review of the statement made by the piece of writing and the economic literature on
growth and sustainable environment lead to the suggestion that economic growth and
environment tend to be competing objectives; however, the use of sustainable technologies is a
step forward in the direction of reducing the impact of growth on the environment. The
governments need to adopt a model of growth that offers sustainability to the environment and as

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suggested by the object the developed world has the resources and the capability to facilitate the
protection of environment by promoting strict international laws and standards regarding the
environment.

Conclusion

The critical review of the article and the literature regarding growth and environment leads to the
suggestion that these are competing objectives and it is the responsibility of the regulatory
authorities to strengthen international law for the preservation of environment. The piece of
writing argues that growth leads to the enabling of the government and the society to pay for the
environmental needs of the country however, this statement fails to recognize the competing
goals of growth and environment. The objective is to ensure the growth is responsible and
regulatory authorities in the developed world should rely on a strong mechanism for ensuring
that growth is sustainable.

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