Business Case Studies - The 'Policies' [Virtual Economy]

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Business Case Studies - The 'policies'

Having chosen a firm that you are going to consider for your case study, you now need to choose a policy. We have chosen four different styles of policy - choose one of them and then go to the Virtual Economy model Model to try them out. (You can also click on the 4th floor in the side panel or the top navigation bar to access the model.) Use the results to note down the results of the policy.

Policies

  1. A deflationary policy Look up Deflationary Policy in glossary - this policy reduces the level of aggregate demand Look up Aggregate Demand in glossary in the economy and will therefore have the effect of reducing growth and inflation. Unemployment is likely to rise.
    • Increase the basic tax rate from 22% to 25%
    • Increase the higher rate of tax from 40% to 42%
    • Increase the interest rate (base rate) by 1 percentage points
    • Reduce government current expenditure Look up Current Government Expenditure in glossary by 3%
  2. A reflationary policy Look up Reflationary Policy in glossary - this policy will boost the economy by increasing the level of aggregate demand Look up Aggregate Demand in glossary . It will increase the level of economic growth, but may cause higher inflation as a result.
    • Reduce the lower rate of tax from 10% to 8%
    • Reduce the basic rate of tax from 22% to 20%
    • Reduce the top rate of tax from 40% to 38%
    • Reduce the interest rate (base rate) by 1 percentage points
    • Increase the level of government current expenditure Look up Current Government Expenditure in glossary by 3%
  3. A supply-side policy Look up Supply-side Policy in glossary - this sort of policy is aimed at boosting the potential level of output of the economy - the aggregate supply Look up Aggregate Supply in glossary . In other words we want to increase the capacity of the economy to produce. We have cut taxes to try to encourage people to work harder and cut interest rates to encourage more investment.
    • Increase the threshold on the basic rate from £29,400 to £35,000
    • Reduce the top rate of tax from 40% to 36%
    • Reduce the basic rate of tax from 22% to 20%
    • Reduce the interest rate (base rate) by 1 percentage points
    • Cut both government current expenditure Look up Current Expenditure in glossary and capital expenditure Look up Capital Expenditure in glossary by 1%
  4. A policy that redistributes income from better-off to the less well-off - this policy aims to change the distribution of income by raising top tax rates and lowering tax rates at the lower end of the income scale. It also increases benefits to help those not working.
    • Increase the personal allowance from £4,535 to £10,000
    • Cut the lower rate of tax from 10% to 8%
    • Cut the basic rate of tax from 22% to 20%
    • Increase the top rate from 40% to 50%
    • Reduce the tax threshold on the basic rate from £29,400 to £20,000
    • Increase income support by 5%

Once you have chosen a policy, go to the model Model and try the policy out. Record the results on the results sheet.