The most efficient method is improving government expenditure. In this way, the injections increase with government expenditure, the aggregate expenditure is increased. Besides, because of E= Cd + J and W= Save + Tax + imports. If the government reduces taxation, withdrawals will decline. Theoretically, people will consume more which causes Cd increases. As a result, the aggregate expenditure is increased. With these fiscal policies by governments, the deflationary gap can be eliminated. (Sloman, 2007, P255)
Actually, many governments carried out those policies in order to solve the economic crisis, such as the UK. First of all, there are some data that can show the economic conditions in the UK in 2008 and 2009. From diagram 4, in the third quarter of 2008, the GDP fell 0.93%. GDP growth was -1.8 percent in 2008. UK economy is currently in an official recession. (Rogers, 2010) However, by the end of 2009, the GDP of UK rise 0.44 percent. UK unemployment was 1.92 million between September and November in 2008, up131, 000 from the previous three months, the highest level since September 1997. In addition, unemployment is likely to rise to close to 3 million by the end of 2009. (Seager, 2008)
UK Interest Rates Interest rates have fallen significantly in 2008. After the economic crisis, the interest rates kept falling until 0.5 percent which is the lowest rate in history. All the data illustrates the UK was affected by the current global economic crisis. Nevertheless, from diagram 3 we can find that the GDP of the UK was positive in 2009 Quarter 4 and 2010 Quarter 1. It means the economy of the UK started to recover and the government did a good job to boost the economy.
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In order to revitalize the economy, the British government instituted some fiscal policies. Due to the fact that the UK was affected by the US sub-prime crisis, which caused people to lose confidence in the financial industry. From the data above, 1.92 million people lost their jobs between September and November in 2008. (Seager, 2008)Also, as a result of mass unemployment, people did not want to invest in the business or borrow from a bank. The majority of people prefer to save money. Therefore, "The Government has begun nationalizing the British banking industry, pumping ï¿½37 billion of taxpayers' money into HBOS, Royal Bank of Scotland and Lloyds TSB".( Porter, 2008) It could reduce borrowing costs, improve the private credit market environment.
Moreover, the total government public spending in the UK is 575 billion in 2008 and 631 billion in 2009 which means the British government increased government spending by about 56 billion in order to stimulate the economy. (Chantrill, 2010)Due to the multiplier process, the increased government spending could promote the can promote the development, energetically exploring the consumption area and expanding domestic consumption demand. Besides, it could absorb the workforce and stimulate market purchasing power.
In addition, total Government Net Lending/ Borrowing (National Currency) for the United Kingdom is GBP -152.032 billion in 2009. In the previous year, 2008, total Government Net Lending/ Borrowing (National Currency) for the United Kingdom was GBP -69.78 billion Total Government Net Lending/ Borrowing (National Currency) for the United Kingdom in 2009 was or will be 117.89% more than it was or will be in 2008. The reason is that the British government has to boost the national economy by large public borrowing. In March 2009, the interest rate was 0.5%. However, the dramatic cut in interest rates could not help the UK out of the economic crisis. Therefore, the British government had to turn to fiscal policy in order to stimulate the economy.
Overall, the majority of the policies such as cutting tax, increasing government expenditure and external debts by the British government are designed with Keynesianism. Therefore, the Keynesian theory can help the government recover the economy to some extent. However, there are some other policies that could not meet Keynesian theory such as cut interest rates, and this monetary policy could not help the UK out of a recession. Consequently, the government should make rational use of Keynesian theory and avoid negative policies. In this way, the economic crisis can be abated.
- Ablemesh.co.uk, 2007, [Online] UK financial crisis 2007 | 2008 Available at: http://www.ablemesh.co.uk/thoughtsukfinancialcrisis.html (Accessed date: May 8, 2010)
- Chantrill. C, 2010 [Online] Total Public Spending Expenditure - CHARTS - GDP Debt, Available at: http://www.ukpublicspending.co.uk/
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