interest rate management Monetary policy is concerned with managing the monetary environment by effecting either the availability

or the price of credit. Demand for monery is the preference for holding ones financial assets in the fully liquid form of cash rather than is some relatively illiquid form such as bonds and shares.this is due to 3 motives the transactions motive Precautionary motive Speculative motive Supply of Money is determined by the credit creation activities. A change in it can affect money supply and hence rate of interest. Credit creation by banks tis restricted supply of cash and liquid assets in the financial system.

Interst rate policy management: Uk govt has a Monetary Policy Committee at the bank of England. It has the power to decide the target rate of interest. Also It has a target rate of inflation of 2 % If the rate of inflation is above or below 1% of the target rate of 2% i.e + or 1%, the Bank will provide written explanation to the chancellor of the exchequer. Despite inflation being above 2% in 2011, MPC has kept interest rates at 0.5% to counter the global recession and to boost lending and liquidity in financial markets Motives for holding cash supplementary reading Transactions Motive Money is used as a medium of exchange i.e as a means to do business so people need money to do business. Demand for money will be based on the following:

Level of real income Rise in the standard of living raises expenditure and hence increases the demand for money Rate of inflation. In periods of inflation (rising prices) demand for money for transaction purpose will rise because of increase in the monetary value of transaction has increased Precautionary motive People keep money to meet unforeseen personal and financial contingencies Nornmally these are kept in banks and building society deposits which can be accessed in an emergencies via debit card and ATMs Speculative motive Some people may hold money in order to speculate with it To undertake potentially profitable risks, from betting to a the perchase of assets. The amount of money held for speculatin is largely denpendent on individual income levels Main money speculators are financial institutions rather then individuals The potential speculators are interested in the real rate of interest from asset buying. So they do include expected rates of inflation in to their calculations. Other things equal, speculative demand for money is lowest in times of high inflation as the money is losing its value very quickly

Functions and qualities of Money

4 main functions of money are: Medium of exchange A store of value

A unit of account A standard of deferred payment

Qualities of money To fulfil the functions of money, a financial asset should have the following characteristics Acceptability\people should be willing to accept money, it should be generally acceptable. Durability it should not physically deteriate It should have a stable value It should be portable and divisible.

Fiscal policy taxation and spending

All government need to raise revenue. Most of the taxation revenue now is spent on more socially desirable expenditure such as education, health and social services Taxation as a tool can be used for: Reducing the consumption of demerit goods e g cigarettes and alcohol by taxing them heavily, raising their prices and reducing their demand and consequent consumption Increasing and reducing Aggregate demand by reducing and increasing tax rates respectively Providing Public goods so that these are free available e g Defense and police services. Similarly, providing merit goods e g education at zero price so that

everyone can have free education whether they can afford it or not as these merit goods are socially desirable for every one Changing the distribution of wealth by varying the tax rates and implementing progressive tax system to tax the rich heavily or using regressive system if considered worthwhile. Principles of taxation Adam Smith outlined four principles of taxation. Certainty People must know in terms of what, when, how and where to pay Convenience e g by monthly instalments instead of collecting it on a yearly basis Equitable it should be based on an individuals ability to pay. it is now agreed that a progressive element to income tax is fair in that the better off can bear a higher a tax burden more easily than those on low incomes. Economy: taxes should be cheap to collect. Efficiency a tax should achieve its objective and should not undermine other aims and taxes. A tax should encourage a payee to put more effort rather than making him/her ease loving. Flexibility of a tax a tax should be capable of variation in order to fit with changes in economic management.

Types of taxation
Taxes can be classified in several ways The 3 main types are

what is taxed? Who is levying tax ? Who is paying the tax?