UK Macroeconomic Policy: Achieving Inflation and Unemployment Targets

This report provides a comprehensive analysis of macroeconomic objectives, focusing on the UK government's policies to maintain inflation at 2% and lower unemployment rates. It delves into the roles of monetary and fiscal policies, including the Bank of England's interest rate adjustments and government initiatives like the Job Entry Targeting Supports (JETS) program. The report discusses the importance of low inflation for economic stability and the benefits of reducing unemployment, such as decreased government debt and economic growth. It also contrasts fiscal and monetary policies, highlighting their advantages and disadvantages in achieving macroeconomic goals, with an emphasis on the challenges and limitations of each approach.

Macroeconomics

Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................4
Government policy objective 1................................................................................................................4
Government objective 2..........................................................................................................................6
Other factors help to achieve these objectives.....................................................................................10
CONCLUSION.............................................................................................................................................11
REFERENCES..............................................................................................................................................13

INTRODUCTION
Macroeconomics is a discipline of terms associated with the big functioning of an economic.
Microeconomics, on the other hand, is concerned with how personal financial actors, including
customers and businesses, make choices. Macroeconomics is the branch of economics that
studies huge or overall economic phenomena as well as how they function in nations. Since the
Fed Treasury's objectives durable population and macroeconomic stability assessed and attained
on an overall economic scale rather than on an individualized one, economics is thoroughly
scrutinized (Anderson, Asche and Garlock, 2019).
There are mentioned two main government objective is “to keeping inflation at 2%” and
“Lower unemployment”. The aim for inflation is 2%, as measured by the growth in the
Consumer Price Index over a 12-month period (CPI). The 2-percentage-point inflation objective
is symmetric and applicable at all occasions. This represents the UK monetary policy
application's emphasis on market stability for a forward inflation objective. The government's
approach to controlling inflation is unwavering, as is the Bank of England's operating autonomy.
The operative aim for monetary policy maintains a 2-percentage-point growth in the Consumer
Price Index over a 12-month period. The 2% inflation objective is in effect at all periods. The
importance of market stability as well as the inflation objective in the UK inflation targeting
framework is shown in this. Lowering unemployment reduces government debt and boosts the
economy. The availability of employment to individuals who are jobless positively affects the
fiscal condition of the country and leads to better economy. As per figures released previously by
the government institution ONS unemployment in the United Kingdom decreased to 4.1 percent
in December 2021, down from 4.2 percent in the previous quarter month. Observers have noted
the statistics also revealed solid payroll numbers, which indicated a gain of 184,000 jobs, which
showcases that the labour market is on its way from completely moving past the downward
conditions created during the pandemic.
On the basis of these objectives analysis monetary and fiscal policies that help to effectively
achieve these objectives. In this report consist of mention both objectives and related policy in
broad manner.

MAIN BODY
Government policy objective 1
The Monetary Authority (MPC) of the Bank of England estimates figures related to the
rate of interest aiming to lower the consumer price index inflation and reach it down to the two
per cent figure. The Bank of England, on the other hand, does not adhere to a "tight inflation
objective." Low inflation is important since it instils trust in customers and companies. When
inflation begins to increase, it lowers morale and may lead to the belief that it will continue to
rise, triggering a cost-push inflation dynamic in which prices and wages rise in a downward
spiral. In the United Kingdom, the responsibility of lowering the inflated economy is tasked to
the Bank of England, chief financial institution of the country. A zero-inflation aim increases the
danger of deflation, which occurs when wage rates fall in lockstep. Consumer spending shrinks
as a result, and the industry enters a slump (Dolfin, Leonida and Outada, 2017). This really is
due to the fact that quantitative easing only to maintain costs under control might stifle economic
development. The 4% key frame objective for inflationary, with a 6% higher tolerable limits and
a 2% lower specification limitation, is assessed in terms of the consumer price index (CPI). The
aim of the government is to ensure that the inflation of UK economy is controlled to the level of
two per cent. This act supports maintaining lower levels of inflation which helps individuals and
businesses make future preparations. In comparison to this, in case of high inflation or
fluctuation in inflation, determining pricing strategy and taking other professional or personal
financial decision becomes difficult.
Formulation of fiscal policy in banking institutions of the contemporary age revolves
around the inflation degree as it is a primary meter for looking ate monetary policy. Banking
institutions with central power have the ability to impact on fiscal policy through rising interest
rate or implementing combative decisions whenever demand rises sooner than predicted. The
ability to save money and invest money in external opportunities dries up because of rising
inflation which reduces cost-effective financing options. In similar fashion central banking
institutions take action to tackle downgrading economy and heightening inflation by lowering
interest rate which acts as a suitable financing option. Inflation targeting considers low inflation
to be the fundamental aim of the banking system. A standard strategy of inflation expectations
can make use of all of a public company's monetary policy instruments, particularly financial

markets and discounted borrowing. Price stability differs from central bank policies that
priorities other indicators of economic success, including currency values, unemployment
figures, or actual GDP growth rates.
It would be in the interests of monetary officials who were already autonomous of the
government to guarantee inflationary pressures in order to maintain inflationary pressures lower
among customers and firms. However, they may find it difficult to avoid extending the money
supply in reaction to following events, resulting in an "inflationary suprise." That shock would
enhance productivity by rendering labor relatively inexpensive (price adjustments are delayed),
while simultaneously lowering the real, or wage growth, worth of public debt.
One of the main options which can be selected to deal with high inflation is contractionary policy
enforcement. Implementation of such policy leads to upper rate of interest and lesser lending cost
and result in limited economic rise in money supply. The usage of contractionary policy supports
reduction in outflow of money as consumers prefer saving instead of spending in times of

financial scarcity. Reduction in expenditure is also implied as financial sources become rare in
accessibility. The speed of rising inflation can be stopped through reducing in expenditure as it
leads to lower economic growth. Strategies that delay the growth of AD and/or increase the pace
of supply curve improvement can help to lower inflation (AS)
If want to keep inflation under control, they need to regulate consumer spending. If the
government has declared AD is too strong, it may opt to 'tighten fiscal policy' by lowering
money on social and relation to the success, as well as social security payments (Banzhaf, Ma
and Timmins, 2019).
It has the option of increasing indirect taxation, which would result in a decrease in actual
expendable cash.
As a result, consumption and production may be reduced, due to a short negative impact on
employment and real financial development.
The time period of restricting the fiscal policy’ ' involved rise in bong outcome introduced by
central bank so that consumer spending can be enhanced.
The cost of international products can be lowered through enhancement of rate of interest
because it supports increase in currency rate and services while also reducing export volume (X)
Government objective 2
Low unemployment: The government has committed more than £200 million in the Job
Entry Targeting Supports (JETS) initiative for persons who have been out of work for more than
three months. This Great Britain-wide plan, which was announced in July 2020 and started in
October 2020 in England and Wales and January 2021 in Scotland, is now functioning properly.
The government's budgetary policy is the second method it decreases unemployment. The
administration and Congress use fiscal policy growth to generate jobs by raising expenditure on
public works projects. By cutting spending, the programme can also provide people with greater
disposable cash. Unemployment is hard to accurately estimate, and most measurements do not
account for staff that perform component yet would prefer full-time job. In a capitalist economy,
achieving zero unemployment is nearly difficult. There will still be some transitory and periodic
unemployed, for example, as some people transition from one job to another. In practice, a level

of unemployment of roughly 4% or smaller is considered near to economic growth. When
unemployment is low underneath this threshold, inflation is expected to rise in tandem.
Fiscal policy can serve to minimize unemployment by increasing consumer spending and
the development of the national economy development. The government will have to adopt
expansionary fiscal, which entails lower costs and regulations government expenditure. Lower
taxes enhance discretionary money (e.g., VAT was reduced to 15% in 2008) and hence aid to
stimulate consumption, resulting in stronger consumer spending (AD). Nominal GDP will rise in
response to a rise in AD (as long as there is spare capacity in the economy.) If enterprises create
more, there will be greater demand for employees, resulting in fewer customer unemployed.
Furthermore, with increased consumer spending and robust economic development, fewer
enterprises will fail, resulting in reduced jobs lost. Throughout a lengthy downturn, Keynes was
an outspoken supporter of expansionary fiscal. It contends that during a downturn, commodities
(both productive capacity) are inactive. As a result, the government needs to step in and create
more demand in order to minimize unemployment.

Furthermore, during harsh economic times, the government ends up spending more on jobless
benefits while also giving lower taxes receipts (lesser VAT, reduce taxation on income). This
action enhances joblessness in the country and rises liability over government institution. Lastly,
the impact of joblessness is likely to worsen societal issues such as criminality, damage, and
disconnectedness, particularly in case of young demographic not being able to find work in such
economic enviornment.
Considering the costs of unemployed, there are several economic advantages to attaining full
employment. Furthermore, reaching high employment would have the unintended consequence
of boosting other policy goals. Lowering unemployment reduces public debt and encourages
economic.
Difference
The two most crucial instruments for keeping the economy strong are fiscal and monetary policy
regulation. Both have an economic impact, but in various manner. The goal of monetary policy is
to maintain price stability for the goods & services people purchase. The central bank's duty is to
keep inflation low, steady, and foreseeable. Inflation is the rate at which total consumer prices
vary over time. Governmental financial activity are referred to as fiscal policy. Authorities might
choose to invest money on infrastructure goods, economic development, and reducing
disparities. Companies can get this tax revenue or financing on the money system.
Advantage and disadvantage of monetary policy:
Monetary policy includes all the activities done by a nation's central bank to accomplish
its economic policy priorities. Many financial institutions are entrusted with achieving a specific
amount of inflation. In the United States, the Federal Bank (the Fed) was formed with the goal of
achieving optimum financial stability. There is mentioned advantage of this policy:
Regulation on inflation through targeted rate of interest: The growth of an economy is
facilitated with few levels of inflation as it promote rise of pay and supports future development
of economy. The definition of inflation states that it involves rise in price of goods and services

in the economy. The industrial economic growth is affected by inflation as targeted interest rates
are heightened and investing becomes expensive.
Rise in exporting: Reducing the valuation of regional currency happens in case of heightened
supply of money and reduction in interest rate. This can facilitate rise in exports as the currency
becomes less valued from global perspective attracting international export opportunities.
Can be implemented fairly easily: Monetary authority have the ability to use fiscal tools easily.
Usually, a simple announcement of the objectives to the marketplace has the ability to get
outcomes.
Disadvantage
Technical limitations: There is possibility to reduce the rate of interest to 0% which results in
introducing limitation of the options of banking institution to use fiscal policy tools in case of
minimizing interest rate. The low level of rate of interest for large time period results in creating
liquidity crunch. Fiscal policy tools offer best results in times of economic growth in comparison
to time of downturns as a result. Several European financial institutions have lately
experimenting with negative interest policies (NIRP), although the outcomes will not be
understood for such period.
Effects have a time lag: On a macroeconomic scale the results from fiscal policy tools require
time to produce outcome. There can be time period long upto months or weeks to gain results on
macroeconomic scale. Several economic experts have stated that the concept of money is
"simply a curtain," but although it can promote an economic growth but there are not many
advantages from a long term perspective and only affects rise in prices not economic areas.
Fiscal policy: It is defined as the govt's spending and taxation. Fiscal policy that is tight
or restricted involves raising costs and cutting public budget. A flexible or investment demand
fiscal policy, on the other hand, is employed to stimulate economic development. Several fiscal
policy instruments are founded on Keynesianism and aim to increase consumer spending.
Advantage:

 Direct spending to specific purposes: Even the presence of fiscal tools which have
widespread application can be focused towards spending in singular sectors, markets or
regions so that economic growth is facilitated in which it is seen to be most required.
 Use taxation to discourage negative externalities: Externalities and people who abuse
insufficient budget might be taxed to assist minimize negative consequences they
produce all while producing federal revenue.
Disadvantage:
 Create budget deficits: A budget balance occurs whenever it spends millions of dollars
than the receives. When expenditure is high but taxes are higher for an extended period of
time, the imbalance can balloon to disastrous proportions.
 Rise in imports: The increase in money supply through reduction in tax also lead to the
negative result of rise in imports and the money being spent on international markets.
There is no benefit for local economic development and the aim of tax ease is hindered.
Other factors help to achieve these objectives
Factors to control inflation
 Wage growth is an important aspect in influencing inflation. Inflation will be high if
salaries rise rapidly. There had been a temporary experiment at wage restrictions ("Price
and Income Policies") in the 1970s, which attempted to restrain pay increases. This was,
nevertheless, essentially discarded since it was difficult to implement broadly.
 The best method to keeping inflation under control in the short run is for the government
to maintain consumer spending at a level compatible with our productive capability. AD
is likely to be best handled through use of financial regulation instead of an excessive on
fiscal policy as a requirement tool.
 Reducing consumption to control inflation is unlikely to be successful in the near run if
the major reasons are outside disruptions like rising global fuel and medicine costs.
Because the United Kingdom has an expanding economy, developments in the rest of the
globe have a significant impact on inflation.
 Inside the lengthy period, it is the expansion of a nation's supply-side producing capacity
that allows an economy to thrive without seeing a surge in cost and price increases.

 The United Kingdom embraced a type of quantity theory of money where the focus of the
government was to control inflation by through regulation of fiscal base. Decision was
taken to enhance interest rate and reduce budget shortfall in order to control the money
supply. It did reduce inflation, but at the price of a severe recession. Supply side
economics was essentially destroyed since the relationship between inflation and interest
rate was less than anticipated.
Factors to reduce unemployment
1. Edification and instruction: This involves setting objectives so that unemployed individuals
are able to develop capabilities currently in demand in the labour market and become eligible to
work in various industries like teaching digital knowledge to retired individuals so that they have
employment opportunities in public sector. Given the existence of courses and workshops, the
jobless may be still unable reluctant to gain experience. At most, reducing unemployment will
take some years.
2. Limit the authority of labor unions: When unions are able to negotiate for salaries that are
greater than the market that it, they will create unemployment problem. In this instance,
lessening the collective bargaining power (or lowering wage levels) will aid in the resolution of
real wage jobless.
3. Subsidizing employment: This involves offering businesses ready to recruit unemployed
individuals subsidy or incentive. In this way they are able to gain job security as well as
opportunity for professional growth. This is expensive option for reducing unemployment and
can also be used for replacing young employees with old jobless individuals in order to exploit
the subsidy offered by the government.
4. Increase the labor industry's adaptability: It really is found that higher structure unemployment
levels in Europe are the result of restricted labor supply, which deters enterprises from
employing people during the first instance. For instance, eliminating limit working days and
allowing it simpler to recruit and fire employees might lead to more employment generation.
Higher labor interventions in terms, on the other hand, may lead to a rise in casual cost and work
rising unemployment.