Macroeconomics: Brexit and Fiscal Policy, Factors Affecting Interest Rate Decision

Running Head: MACROECONOMICS
Macroeconomics
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Name of the University
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1MACROECONOMICS
Table of Contents
Answer to question 1.......................................................................................................................2
Brexit referendum and effectiveness of fiscal policy..................................................................2
Answer to question 2.......................................................................................................................4
Factors affecting interest rate decision........................................................................................4
References list..................................................................................................................................8

2MACROECONOMICS
Answer to question 1
Brexit referendum and effectiveness of fiscal policy
Prior to Brexit in June, 2016 United Kingdom was one of the fastest growing nation
across the world. However, after Brexit economic growth has significantly slowed down
following internal and external changes in the economy. Slow economic growth in United
Kingdom is representative of a material loss of Britain in the global market. Productivity growth
has been slowed down with output per hour remained almost flat or declined. Another factor
contributing to a sluggish economic growth is depreciation of currency (Young 2017).
Depreciation of sterling results in an increase in price of exported item leading to a deficit in
trade balance. The economy thus in a need of effective policy support from government and
regulatory authority.
Government in an economy can provide stimulus to the economy either through fiscal
policy or through monetary policy. The policymakers are facing problem in formulating suitable
policies in a phase of uncertainty about future productivity growth. The Office for Budget
Responsibility (OBR) assumed productivity growth to be increased from a current rate of 1.4
percent to 1.8 percent but 2021. Despite the slow productivity growth, policy maker still remains
optimistic about economic recovery as experienced after global financial crisis in 2008. Based
upon these assumptions government announced no change in spending plans and hoped to
maintain a balanced budget (Johnson and Mitchell 2017). However, there remain substantial risk
regarding the assumption of productivity growth and hence, design and effectiveness of fiscal
policy. If weak productivity is continued for a very long period, then government might
experience a net borrowing of substantial size.