2. The Central Bank cannot be solely responsible for stabilizing the economy. Who else is responsible and what role do they play?
The central bank doesn’t control the economy; there are others that have an effect on the economy. These include, the government, stock markets, commercial & retail banks, businesses, and the EU.
Along sides the central bank the next key player in molding the economy is the government. The government influences the economy in everything they do. A government’s main aims for an economy are:
• Economic Growth, and
• Economic Stability
The government employs millions of people. For example the UK government employs NHS workers, Police, Civil ...view middle of the document...
Fiscal policy is a policy from the government that deals with the budget. The government can control fiscal policy to control aggregate demand in the economy. This means that they can effectively control the total demand for all the goods in the economy. The government has means to help stabilize the economy, for example taxation.
The less tax that people pay on their incomes the more money that hey will have to spend and this will increase demand. If a government raised income taxes it would mean people have less money to spend, the government, however, would have more. The government can control this by lowering or raising income tax.
The government has the responsibility to keep the correct balance between taxation and public spending, to ensure that there is sufficient money on both sides to have enough spending to keep the economy stable.
An example of this is when the UK government raised the Value Added Tax rate to 20%, they lowered the amount of income tax that people pay by raising the thresholds to around £9000.
Commercial & Retail Banks
Banks play a vital role in the stabilization of the economy. Without banks, many businesses wouldn’t exist, as they would have the capital to start up. Banks provide financial resources, which is used for economic development.
Banks also provide other services, such as credit cards, debit cards, cheques, etc. With this it has allowed the quick and easy transfer of funds between individuals, and trade, resulting in an expansion of trade. Banks can also help develop undeveloped regions of a country as all of the money that people invest into a bank is invested, meaning that surplus money from rich regions can be invested in these poorer regions.
Banks are also responsible for their rate of interest earned on savings in their care and the amount charges. Banks can control the availability of credit, and the interest rate, meaning that they can encourage people to spend and not save, thus controlling the aggregate demand.
Banks can also issue credit (via credit cards, or consumer finance), this increases the amount of money circulating in the economy. In USA banks provided mortgages to people who were likely unable to repay them. This is blamed for the global recession of 2009. This is an example of the amount of power that retail banks play in the economy.
Businesses also play a vital role in stabilizing the economy.
In the UK there are about 4.9 million businesses, which employ around 24 million people. This allows the circulation of cash. By businesses employing people it gives them money to spend, pay taxes, and fuel the economy.
If people weren’t employed they would be claiming job seekers benefits, would be less likely to spend cash, and possibly save their money and be thriftier. This links in closely to the paradox of thrift as mentioned earlier.
In 2008 small businesses were responsible for approximately 50% of private nonfarm (this...