Unit 14
Reading I: Monetary policy
Monetary policy is one of the tools that governments use to control theeconomy. This policy mainly involves making changes to the interest rate. It can also involve changing the amount of money that circulates round the economy. It should be said that monetary policy isn’t very often used, because it can lead to inflation. The other method – changing interest rates is used quite frequently for slowing down or speeding the economy up. Usually, it works this way.
Commercial banks borrow their money from the country’s central bank. This is the government bank, and it has the power to set interest rates. The interest rate of the central bank will influence the rates which commercial banks set for their customers. When interest rates go up, borrowing money becomes more expensive; and it becomes cheaper, when they go down.
People take loans from banks for different reasons, but the biggest loan people take out is – to buy a house. This kind of loan is called a mortgage. Mortgages become more expensive, when interest rates increase. People who already have a mortgage will need to pay more on their repayments, so they have less money to spend on other things. Consequently, fewer people will want to buy new houses and house prices will fall. In turn, home owners will feel less confident about their own wealth and will spend less. As a result, the economy slows down. A fall in interest rates should have the opposite effect on the processes of buying houses.
Borrowing money, consumers also buy other things. This is so called buying on credit, and interest rates will, undoubtedly, affect how much people spend oncredit. Purchases made with using credit cards are now a huge proportion of total spending in many countries. What does it mean? It means that interest rate changes have a big impact on consumer spending and the economy as a whole. Companies are also affected by interest rate changes. When interest rates are low, they feel more confident about investing with the aim to expand their business. Low interest rates will encourage them to take out loans in order to build plants, buy machines and increase production. All of these activities increase the size of national output. And again, higher interest rates will have the opposite effect.
Lastly, interest rates can have an effect on the amount of exports of any country. This is because the value of a currency (the exchange rate) often falls with the interest rate falling. When the value of a currency falls, a nation’s products and services become cheaper for customers from other countries. This increases export sales, and more money comes into the economy. And, of course, a rise in interest
rates will mean a rise in the exchange rate. This will reduce export sales, and reduce the total output of the economy.
Vocabulary
monetary policy – кредитно-денежная (монетарная) политика involve – вовлекать, включать в себя
slowdown – замедлять speed up – ускорить
interest rate – процентная ставка expensive – дорогой
cheap – дешевый
mortgage – ипотека, ипотечный кредит сonsequently – следовательно, поэтому owner – владелец, собственник confident – уверенный
opposite – противоположный buy on credit – покупать в кредит purchase – покупка
impact – воздействие
reduce – снижать, уменьшать exchange rate – обменный курс
Assignment 1
Answer the questions, according to the text.
1. What is monetary policy?
2. Is it very often used?
3. Which method is used more frequently?
4. How does it work?
5. What is a mortgage?
6. Are purchases, which made with using credit cards, very frequent nowadays?
7. Do interest rate changes affect the economy as a whole?
8. Are companies very much affected by interest rate changes? Why?
9. In what way do interest rates effect on the amount of exports of any country?
10. What is buying on credit?
Assignment 2
Suggest the Russian equivalents for the expressions and word-combinations given below.
One of the tools to control the economy; make changes to the interest rate; change the amount of money that circulates round the economy; monetary policy isn’t very often used, because it can lead to inflation; the other method is used frequently; for slowing down or speeding the economy up; commercial banks borrow their money from the central bank; the power to set interest rates; influence the rates which commercial banks set for their customers; take loans from banks for different reasons; mortgages become more expensive, when interest rates increase; to pay more on repayments; house prices will fall; home owners will feel less confident about their own wealth; a fall in interest rates has the opposite effect on the process; so called buying on credit; interest rates affect how much people spend on credit; purchases made with using credit cards; a huge proportion of total spending in many countries; changes have a big impact on consumer spending; companies are affected by interest rate changes; they feel more confident about investing with the aim to expand their business; to encourage companies to take out loans in order to build plants and increase production; these activities increase the size of national output; have the opposite effect; have an effect on the amount of exports of the country; the value of a currency (the exchange rate) often falls with the interest rate falling; a nation’s products and services become cheaper for customers from other countries; a rise in interest rates will mean a rise in the exchange rate.
Assignment 3
Fill in the gaps in the following sentences:
1. Monetary policy involves making changes to the interest … and controlling the money circulating in the economy.
2. The interest rate is usually set by the… of a country, which also serves as a lender for commercial banks.
3. When buying houses people often take out mortgages from commercial banks. If the interest rate increases, … becomes more expensive.
4. If the interest rate is low, the national currency value falls, and national goods and services become … for foreign buyers.
5. If the interest rate is not high, exports begin to grow and more money comes into ….
Assignment 4
Do you like to by on credit? Would you advise anybody to do it very often?
Reading II: Fiscal policy
Fiscal policy is one of the tools of the government to keep the economy on asteady path. It is an instrument of demand management which is used to influence the level of economic activity in the country through the control of taxation and government expenditure. So, the two main components of fiscal policy are changes to the tax system and changes in government spending.
Firstly, we should look at the tax system – an income tax, in particular. It is one of the biggest sources of income for a government. Many governments operate a system called progressive taxation. This means that the more you earn – the more tax you pay. To control aggregate demand or spending the government can use a number of taxation measures. For example, direct tax on individuals (income tax) and companies (corporation tax) can be increased if spending has to be reduced to control inflation. Spending can be also reduced by increasing indirect tax. In this case an increase in the value added tax (VAT) on all products or excise duties on particular products (such as petrol or cigarettes) will result in lower purchasing power.
Government spending can also affect economic system of the country. When the economy is not growing, it needs a pull in demand for goods and services. The government can provide this pull by spending a large amount of money on public projects. Such project can give work to companies (building ones, for example, or any others) and jobs to unemployed workers. So, more resources will be being used, and the nation’s productivity will be increased.
The government is any time able to change its own expenditure in order to affect spending levels: a cut in purchases of products or capital investment made by the government can reduce total spending in the economy. If it wants to increase spending, it creates a budget deficit (reducing taxation and increasing its expenditure). A decrease in government spending and an increase in taxes, that is a withdrawal from the circular flow of national income, reduce aggregate demand in order to avoid inflation. On the contrary, an increase in government spending and decrease in taxes, that is an injection (денежное вливание) into the circular flow of national income, stimulate aggregate demand and create additional jobs to avoid unemployment.
The effectiveness of fiscal policy, though, can be reduced, in practice, by a number of problems. Taxation rate changes take time to make. Considerable proportion of government expenditure on schools, hospitals, roads and defense, for example, cannot be changed easily, without lengthy political lobbing.
Vocabulary
fiscal policy – финансовая, налоговая политика steady – устойчивый
expenditure – расходы
source of income – источник дохода
progressive taxation – прогрессивное налогообложение earn – заработать
direct tax – прямой налог reduce – уменьшить
indirect tax – косвенный налог
value added tax – налог на добавленную стоимость excise – взимать акцизный сбор
pull – тянуть, тащить; натягивать spending level – уровень расходов
create budget deficit – создавать бюджетный дефицит withdrawal – изъятие
in order to – для того, чтобы avoid – избежать
on the contrary – напротив injection– здесь: денежное вливание circular flow – кругооборот considerable – значительный
lengthy – длинный; продолжительный
lobby – пытаться воздействовать; проталкивание
Assignment 1
Answer the questions, according to the text.
1. Comment on the term “fiscal policy”.
2. What are the two main components of fiscal policy?
3. What is progressive taxation?
4. Can a government control aggregate demand?
5. How can aggregate demand be reduced?
6. How can it be increased?
7. What is the effect of reduced aggregate demand in an economy?
8. What is the effect of higher aggregate demand?
9. How do governments change spending levels?
10. What can decrease the effectiveness of fiscal policy?
Assignment 2
Suggest the Russian equivalents for the expressions and word-combinations given below.
One of the tools of the government; to keep the economy on a steady path; an instrument of demand management; to influence the level of economic activity; through the control of taxation and government expenditure; the two main components of fiscal policy; changes in government spending; an income tax is one of the biggest sources of income for a government; operate a system; the more you earn – the more tax you pay; to control aggregate demand or spending; a number of taxation measures; direct tax on individuals and companies can be increased; spending has to be reduced to control inflation; spending can be reduced by increasing indirect tax; excise duties on particular products such as petrol or cigarettes; the economy needs a pull in demand for goods and services; spending a large amount of money on public projects; to give jobs to unemployed workers; the nation’s productivity will be increased; the government is able to change its own expenditure in order to affect spending levels; a cut in capital investment; to reduce total spending in the economy; to create a budget deficit reducing taxation and increasing expenditure; a withdrawal from the circular flow of national income; on the contrary; an injection into the circular flow of national income; create additional jobs to avoid unemployment; the effectiveness of fiscal policy; considerable proportion of government expenditure; lengthy political lobbing.
Assignment 3
Translate the sentences into Russian.
1. Social security programs may comprise retirement pensions, invalidity benefits, child benefits paid for every child in a family, housing benefits for low income households and so on.
2. Unemployment benefit systems are said to vary considerably from country to country.
3. Part of the income of households is taxed by the government, which reduces the income share to be allocated to consumption expenditure.
4. Both those who provide capital for a new business and those who run the business are known to bear the risk whereas workers of such businesses are not expected to bear any risk.
5. In a mixed economy, the government is known to control a considerable share of output through taxation, transfer payments, and such services as defense and the police force.
6. Fiscal policy regulates the functioning of the tax system and government spending, both of which affect economic growth.
7. Economists consider higher tax rates to be able initially to bring in greater amounts of taxes raised but to result eventually in a fall in output level.
Assignment 4
What do you think of the progressive taxation? Is it good for the government and people of a country?