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The Political and Legal Environment

The Political and Legal Environment. A2 Business Studies. Aims and Objectives. Aim: Understand fiscal and monetary policy’s effects on businesses Objectives: Define fiscal and monetary policy Analyse fiscal and monetary policies Evaluate the usefulness of government intervention.

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The Political and Legal Environment

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  1. The Political and Legal Environment A2 Business Studies

  2. Aims and Objectives Aim: • Understand fiscal and monetary policy’s effects on businesses Objectives: • Define fiscal and monetary policy • Analyse fiscal and monetary policies • Evaluate the usefulness of government intervention

  3. Government Intervention • Aims to achieve the government’s objectives by controlling and supporting business, passing legislation and taking action to control the economy. • Task: name four types of government intervention in the UK economy

  4. Laissez-Faire • Government intervenes as little as possible, minimise support for and control over industry and keep spending and taxes to a minimum.

  5. Recent Government Intervention • http://www.bbc.co.uk/news/business-12836584 • http://news.bbc.co.uk/1/hi/uk/7853613.stm

  6. Government Policy Objectives

  7. Fiscal Policy • The use of changing tax rates and government spending levels to manage the economy.

  8. Government Policy • How the government alter each of the following to manage (grow or contract) the economy? What effects would these actions have on businesses? • Income tax • Corporation tax • Fuel duty • Government spending

  9. Expansionary Fiscal Policy

  10. Impact on Business Evaluation Increased consumer disposable incomes leading to increased demand. Will depend on what happens to interest rates and wage increases too due to inflation. Lower Basic Rate of Income Tax Increased worker motivation Are workers really motivated? Is it a short term increase?

  11. Impact on Business Evaluation Extra profits could be used for paying higher dividends, increasing investment or keeping retained profits. May have a limited effect in short run. Lower Corporation Tax Encourage more businesses to set up in the UK. Still much lower in Ireland/Poland.

  12. Impact on Business Evaluation Stimulate demand. Causes a multiplier effect on firms, may lead to inflation. Increased Spending Improvements in education and therefore the labour force. May take a few years before the full benefits are noticed.

  13. Contractionary Fiscal Policy

  14. Impact on Business Evaluation Higher transport costs – cost push inflation. Haulage reliant firms affected greatly. Raise Fuel Duty Higher inflation from price rises may lead to demand for higher wages and cost push inflation. May have a small impact compared with oil prices etc.

  15. Impact on Business Evaluation Reduced consumer spending. Aren’t these goods inelastic in their demand? Raise Alcohol Duty

  16. Government Policy • What else can the government do to help businesses? Lower Corporation tax? • http://www.bbc.co.uk/news/business-12843965

  17. Monetary Policy • http://www.bbc.co.uk/news/business-16964069 • The Bank of England controlling the interest rate and the money supply to manage the economy. Expansionary Contractionary Lower interest rate and increase the money supply. May cause inflation! Increase interest rate and reduce size of the money supply. May affect business performance badly.

  18. Supply Side Policies • Policies aimed at stimulating economic growth by stimulating the supply side of the economy – encouraging firms to supply more goods/services or encouraging workers to supply themselves to the labour market. • Worksheet

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