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Your company is preparing for life after Brexit and requires you to produce a report on the potential economic repercussions in terms of the likely business environment it will face. Discuss BOTH of the following issues:
undefined- If Brexit results in a recession how might the government and Bank of England alleviate this with fiscal and monetary policy? Are there any potential problems with such policies?(1000 words)
- Since Brexit has resulted in a new trading situation for the UK, discuss the arguments concerning free trade versus protectionism. (1000 words)
2000 words
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Running head: BUSINESS ECONOMICS
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Business Economics
Student’s Name
Instructor’s Name
Institutional Affiliation
Date
BUSINESS ECONOMICS
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a) If Brexit results in a recession how might the government and Bank of England
alleviate this with fiscal and monetary policy? Are there any potential problems with
such policies?
To begin with, a recession is a macroeconomic term that is used by financial experts to
describe a significant decline in activities in a specific geographical area, let’s say in the UK,
the United States of America to name just a few. There are various metrics that governments
use to determine the stability of an economy. For instance, the level of employment and the
country’s GDP are the commonly used metrics of assessing the stability of an economy
(Brakman et al., 2018). During recession, a country experiences a high rate of unemployment
and a decline in GDP. Britain’s exit from the European Union has several consequences some
of which may result in a recession.
For instance, before Brexit, the UK would sell its goods and services across all partner
countries with fewer on no restrictions at all. For example, Britain would export its products
to the European community without paying taxes and with no maximum limit of exports.
Additionally, under Brexit, the UK citizens’ freedom to work and move to any EU country
also comes to an end. Initially, any person from the UK was free to move and work in any of
the EU’s partner countries without a visa and other requirements that would otherwise
elongate the process of working in another country.
However, under Brexit, UK citizens will require a visa and they will also be subjected to
other migration policies if they wish to work in another country. In the long run, the country
will suffer the following consequences; increased number of unemployed people, increased
number of part time workers rather than full time employees, among others. These factors
reflect uncertainty and thus a recession could be a reality. However, in the event the country
BUSINESS ECONOMICS
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experiences a recession, there are several macroeconomic variables that can be used to
influence the performance of the economy.
The variables are categorized into two; monetary policies and fiscal policies. Monetary
policies are used to influence the level of interest rates in a country and the rate of money
supply. On the other hand, fiscal policies are used to influence government spending and
taxation rates. There are three ways of implementing the two policies; expansionary policies,
contractionary policies and neutral policies (Brakman et al., 2018). Contractionary fiscal and
monetary policies are used when an economy’s GDP is ballooning very fast thus causing an
increase in the rate of inflation above the desirable level of 2%.
On the contrary, an expansionary policy seeks to jump-start the economy mainly during
recession. Therefore, for the case scenario of Brexit, the government is likely to employ an
expansionary fiscal policy. The Bank of England can achieve this by increasing the
government’s expenditure or by reducing taxes on various goods and services. If taxes are
decreased, the disposable income of the people is likely to increase. Therefore, the demand
for goods and services is also likely to increase since people will have more money at their
disposal.
Further, if the government seeks to increase its expenditure maybe by starting various
economic stimulus projects such as development and maintenance of roads, schools and
hospitals, many people will be employed and therefore this will increase their disposable
income. Consequently, the level of unemployment is likely to decline which is one of the
factors that signal an economic recession. On the other hand, if the Bank of England seeks to
achieve economic stability by employing the monetary policy, the bank has several tools it
can use.
BUSINESS ECONOMICS
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These tools include the open market operations, the discount rate, the reserve
requirements and the interests on excess reserves. To begin with, the reserve requirements
refer to the minimum amount of money that the commercial banks must deposit to the Bank
of England. During recession, the Bank of England can reduce the reserve requirements so
that commercial banks will be more liquid to advance loans and other financial benefits to the
people. Consequently, the money supply will increase.
Moreover, the bank can employ the discount rate to counter recession (Brakman et al.,
2018). A discount rate is basically the rate that the Bank of England charges when it lends to
the commercial banks. It is noteworthy that at times, the commercial banks are allowed to
borrow under the discount window from the Bank of England. In the event the country is in a
recession, the Bank of England can open its discount window and reduce the discount rate to
the commercial banks. Consequently, those banks that will be straining to advance loans to
their customers will be more liquid under this window.
Further, the bank can adjust the interest rate on excess reserves. The bank has full
discretion to either encourage or discourage the commercial banks from advancing loans.
Generally, when the Bank of England seeks to spur the commercial bank’s lending, the bank
lowers the rates of excess reserves. On the other hand, if the bank seeks to discourage the
commercial banks from lending, it increases the rates on excess reserves. However, during
recession, the bank seeks to increase the commercial banks’ lending rate and therefore it is
likely to should lower the interest rate on excess reserves.
Finally, the bank can employ the open market operations to counter recession. This is
basically the banks sale or purchase of securities. The Bank of England buys securities when
it seeks to achieve an expansionary monetary policy and on the hand, it sells them out when it
seeks to achieve a contractionary monetary policy. Implementing expansionary...
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