Government Case Studies - The 'policies'

Having chosen a government 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 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 sheet to note down the results of the policy.

Policies

1. A deflationary policy - this policy reduces the level of aggregate demand 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 23% to 25%
   • Increase the higher rate of tax from 40% to 42%
   • Increase the interest rate (base rate) by 1 percentage point
   • Reduce government current expenditure by 3%
2. A reflationary policy - this policy will boost the economy by increasing the level of aggregate demand. It will increase the level of economic growth, but may cause higher inflation as a result.
   • Reduce the lower rate of tax from 20% to 18%
   • Reduce the basic rate of tax from 23% to 20%
   • Reduce the top rate of tax from 40% to 38%
   • Reduce the interest rate (base rate) by 1 percentage point
   • Increase the level of government current expenditure by 3%
3. A supply-side policy - this sort of policy is aimed at boosting the potential level of output of the economy - the aggregate supply. 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 tax threshold on the basic rate from £27,100 to £35,000
   • Reduce the top rate of tax from 40% to 36%
   • Reduce the basic rate of tax from 23% to 22%
   • Reduce the interest rate (base rate) by 1 percentage point
   • Cut both government current expenditure and capital expenditure 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 £4,195 to £10,000
   • Cut the lower rate of tax from 20% to 18%
   • Cut the basic rate of tax from 23% to 20%
   • Increase the top rate from 40% to 50%
   • Reduce the tax threshold on the basic rate from £27,100 to £20,000
   • Increase income support by 5%

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