4. Comprehension

1. Now read the text again and answer these questions in your own words.

2. What are the two tools of fiscal policy?

3. What is someone’s personal allowance?

4. What will the government do to taxes if the economy is slowing down?

5. How can the government create more demand in the economy?

6. When does the multiplier effect stop working?

5. Before you listen. Discuss these questions with your partner. What do you think makes a good tax? Which four things listed below do you think are the most important?

1. It’s easy to collect.

2. It’s paid often.

3. It’s easy to understand.

4. It’s not paid too often.

5. It's a low percentage of income.

6. It's easy to pay.

7. It's fair.

8. It's large enough for the government to use.

6. Listening. Now listen to someone talking about Adam Smith’s four rules for good taxation. Which four ideas from the list above are mentioned?

7. Before you read. Discuss the following with your partner.

Sometimes people feel like spending money. Other times they prefer to save their money. Why is this?

8. Complete each sentence with a word or phrase from the box.

central bank

commercial banks

confident

credit

exchange rate

expand

frequently

impact

mortgage

proportion

repayments

1. We have to pay our bills too___________ in my opinion!

2. A country’s __________is the government bank.

3. The __________ are the high street banks that everyone uses.

4. When a loan is taken out, usually each month ___________ have to be made.

5. A ________ is a special loan for people who want to buy a house.

6. When you feel_________ you feel sure that what you are doing is safe.

7. Many people these days buy things on _______ instead of paying in cash.

8. A large __________ of people use banks to deposit their savings.

9. The __________ compares the values of different currencies.

10. If a company wants to __________ to move into new markets for example, if will need to borrow money.

11. High interest rates have an_________ on the consumer's ability to buy a new home.

9. Monetary policy

Monetary policy is another tool that governments use to control the economy. Monetary policy mainly involves making changes to the interest rate. It can also involve changing the amount of money that circulates round the economy. However, this second kind of monetary policy isn't used very often because it can lead to inflation. Changing interest rates, on the other hand, is a method that is used quite frequently for slowing down or speeding up the economy. So how does it work?

Basically, commercial banks - the ones that you and I use to keep our savings in and to borrow from - borrow their money from the country's central bank. This is the national or government bank, and it has the power to set interest rates. The interest rate of the central bank will influence the rates commercial banks set for their customers. When interest rates go up, borrowing money becomes more expensive. When they go down, it becomes cheaper.

People get loans from banks for all sorts of reasons, but the biggest loan most people take out is to buy a house. This kind of loan is called mortgage. When interest rates increase, mortgages become more expensive. People who already have a mortgage will need to pay more on their repayments, and will have less money to spend on other things. 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 will have the opposite effect on the house buying chain.

Consumers also buy other things using borrowed money. This is called buying on credit, and interest rates will also affect how much people spend on credit. Purchases made using credit cards are now a huge proportion of total spending in many countries. This means that interest rate changes have a big impact on consumer spending and the economy as a whole

Companies, too, are affected by interest rate changes When interest rates are low, they feel more confident about investing in order to expand their business. Low interest rates will encourage them to take out loans in order to build factories, buy machines and increase production. All of this increases the size of national output Again, higher interest rates will have the opposite effect.

Finally, interest rates can have an effect on the amount of exports a country sells. This is because the value of a currency (the exchange rate) often falls when the interest rate falls. 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.