ZIMSEC O Level Business Studies Notes: Aiding and influencing the businesses: Monetary and Fiscal Policies

  • As has already been pointed out in another topic the government has several reasons to want to aid and influence the operations of businesses
  • There are a number of ways in which the local and national governments can do this
  • In this topic we will look at economic policies of the government

Economic Policies

  • The government might control and aid business using its economic policy
  • By controlling the macro-economic environment in which business operates the government can impose its wishes on business
  • Policies include the fiscal policy
    • Fiscal policy involves the use of government spending and taxation as a means of controlling the economy
    • Increasing government spending results in an increase in the spending power of the people resulting in increased economic activity and vice versa
    • Increasing taxation results in a reduction of profits and might impede the ability of businesses to reinvest and expand their operations although it increases the government’s revenue allowing it to redistribute income
    • Taxes include direct taxes such as corporate tax (tax of investment income), capital gains tax, inheritance tax and pay as you earn or
    • Indirect taxes such as Value Added Tax (VAT)
    • Taxes on people’s income can be used to redistribute income or increase demand
    • Value added tax can be used to increase the prices of certain items the government deems undesirable and to raise income
    • Government spending in certain areas through building roads etc can result in businesses locating to these areas
    • Spending in sectors such as health care, defense and roads will encourage direct participation by businesses in these industries as well as businesses that offer ancillary services to these businesses
    • In Zimbabwe the fiscal policy is under the purview of the Finance Minister who is required to come up with a fiscal policy at least once every year including the government’s spending budget
  • The government can also make use of monetary policy
    • This is closely related fiscal policy
    • It involves the control of money supply and interest rates within the economy
    • Increasing money supply results in increased demand within an economy this can be used to revive the economy during times of depressed demand
    • This involves printing more money and introducing it into the economy
    • However doing so can result in inflation and even hyperinflation as happened during the 1999-2008 era
    • To reduce inflation the government might reduce the money supply
    • Similarly the government can reduce interest rates to improve demand
    • For example this results in people being able to afford mortgages
    • This in turn allows them to buy stands, construction material, employ construction companies etc
    • This results in increased economic activity
    • If there is inflation, increasing interest rates results in  an increase in borrowing costs
    • This reduces demand and results in a reduction in the inflation rate
    • In Zimbabwe the monetary policy falls under the purview of the central bank
    • The Reserve Bank of Zimbabwe is Zimbabwe’s central bank

Inflation

  • References have been made concerning inflation above
  • Inflation is a sustained increase in prices of commodities as measured by a set index
  • In Zimbabwe inflation is measured using the Consumer Price Index
  • The Index makes use of  a basket of goods and a weighted average
  • First those doing the calculations come up with a basket (a mix) of products that they deem are essential to an average household
  • For example it could contain mealie-meal, rice, sugar, salt, cooking oil, vegetables, meat etc
  • The price of the various commodities in that basket are tracked and their total calculated every month
  • The percentage change in price is deemed to be the inflation rate for that month
  • The new percentage is added the the percentage total of the last 12 months and divided by 12
  • Each month the oldest month in the yearly total is subtracted and the latest month added
  • This is known as a moving average

To access more topics go to the O Level Business Notes

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