Uk Overview

UK’s current economic situation can be better illustrated in the business cycle shown in figure 1.3. Having an inflation issue does not necessary mean that the economy is at its peak (full employment, strong currency, etc). In the case of UK, they could be recovering from the recession (in 2009) and at the same time, facing rapidly increasing price levels.

Also a victim to the 2009 recession, UK government and central bank had been adopting several policies to aid in the recovery process. Such expansionary monetary policies include the lowering of central bank's interest/discount rate to a low level of 0.5 percent. The UK government also pumped in 200billion pounds by means of "quantitative easing" so as to increase the money supply in the market in 2009. In simple terms, "quantitative easing" is to create "money" in the central bank's books, and using it to purchase assets from the market (i.e. insurance firms, commercial banks and other firms). The beneficiary firm will then be credited with the payment/money in their respective central bank's account. All done electronically without having to print the actual paper money. However, there is a risk to it as it might get out of hand causing an over supply of money in the UK markets, resulting in inflation. These could have led to demand-pull inflation and caused the high inflation crisis in UK starting late last year. However, both policies aim to encourage commercial banks to increase their lendings to each other, as well as to firms and individuals. Expecting an outcome of ↑ C & ↑ I, => ↑ AD (quantitative easing reference)

Insert inflation definition etc etc

To counter the high inflation issue, UK government and central bank have got together to discuss and implement approprate contractionary fiscal and monetary policies.

Contractionary fiscal policy can be carried out by either increasing tax (T) or decreasing government spendings (G), or both concurrently. The UK government has done both, it can be...