Task 2.1: How economic systems attempt to allocate resources effectively.
There are three types of economic systems as, command economy, free market economy and the mixed economy. What to produce, when to produce and in what quantity to produce are answer by the economic system in an economy.
Command economy, is an economy which is controlled by the central government. All the decisions are made by them. As well all the production factors are owned by the government. In this economy, demand and supply is also being controlled by the central government.
There are five characteristics in a command economy. They are,
? There is no competition in the economy,
? The government creates law, regulations, and directives to enforce the central plan which is created by the central government.
? Businesses are not run to make profits
? Change can occur easily
? There is little individual freedom
Free market economy,
This is an idealized economic system in which the prices of goods and services are determined by the open market and customers demand and supply. This is free from any intervention by a government. Proponents of the concept of free market contrast it with a regulated market, in which a government intervenes in demand and supply through various ways. Some of them are, tariffs. Tariffs are used to control the imports and protect the economy from trade malpractices. Here the process of goods and services are set by the forces of demand and supply and they are not restricted by any policy. Here all the resources are controlled by the private sector. Therefore the produces will use them in an inefficient way, and the social welfare will be gone down.
This economy consist of both free market and command economy. Here the government and private sector plays different rolls in the economy. Private organizations run their businesses to earn profits, but the government intention is to provide goods and services which the private organizations don’t provide and also to protect the customer from trade malpractices.
For example, private businesses will not fix street lamps or start a security firm for free of charge, because private organizations are profit oriented. Therefore, for to solve this types of problems the government should intervene. For some products the government fix the price floor and the price ceiling in order to protect the customer. Therefore, out of the three economic systems, the mixed economy is the best economic system for the customers as well the society.
Task 2.2: The impact of fiscal and monetary policy on business organizations and their activities.
Monetary policy has a direct relevance with the country’s money supply. Amount of spendable money in the economy at a given period of time is the money supply of a country.
Monetary policy consist of the action of a central bank, currency board or any other regulatory committee that determine the size and rate of the growth of the money supply in the country which in turn affect the interest rates. Through monetary policy, government tries to discourage people in savings and make people to spend more. Therefore, there will be more money flow in the economy
Monetary policy is maintained through actions such as, open market operations, bank rates, maximum interest rates, statutory reserve ratios, etc.
Fiscal policy is directly related to the changes of government’s income and expenditure. By increasing or decreasing the tax rates and fees charged from people and businesses, the government can alter their income. Through fiscal policy, government controls their income and expenditure.
The government uses contractionary monetary policy and expansionary monetary policy to control their income and expenditure.
Contractionary fiscal policy
Contractionary fiscal policy is when the government either cuts off its spending’s or raise taxes. This contracts the money flow in the economy. This policy reduces the money available in the economy and it will reduce the businesses and consumers spending less.
Expansionary fiscal policy