The Coffee Bean & Tea Leaf(CBTL), Business strategy case study
3.4 Demand And Supply Side Policies
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2. Privatization Deregulation Budget Deficit Budget Surplus National Debt Monetary Policy Fiscal Policy Demand Side Policies Government Securities Supply Side Policies
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8. Fiscal Policy Is a tool the government can use to regulate the economy through its expenditure and raising of revenue through taxation. Monetary Policy Is the tool used by the government to control the economy by controlling money and the banking system (interest rates) Legislation (laws) Is a tool the government can use to control the economy by setting limits and expectations on behaviour. Usually to minimise the negative effects of growth.
9. Increase in circular flow equals GROWTH / BOOM / RECOVERY Decrease in circular flow equals RECESSION Injections to the circular flow increase rate of growth, withdrawals decrease growth
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17. Government Budget More spending than taxation Less spending than taxation Budget deficit Operating Deficit Budget surplus Operating Surplus Expansionary Fiscal Policy Contractionary Fiscal Policy More economic growth Less economic growth
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20. Central Bank sets the Base Interest Rate Private Banks can save and borrow money with the Central Bank They can borrow money at 0.25% + Base Interest Rate They can save money at 0.25% - Base Interest Rate The interest rates of borrowing or saving are passed onto customers plus a profit margin
21. Central Bank increases the Base Interest Rate From 2 – 3% “ Loosening of Monetary Policy” If Base Interest Rate = 2% If Base Interest Rate increases to = 3% DBS can borrow money at 0.25% + 2% = 2.25% DBS can save money at 0.25% - 2% = 1.75% DBS can borrow money at 0.25% + 3% = 3.25% DBS can save money at 0.25% - 3% = 2.75% Customer can borrow money at = 5.25% Customer used to borrow money = 4.25%
22. Customer can now borrow money at = 5.25% Customer used to borrow money = 4.25% Savings Increases Borrowing decreases Consumer Spending decreases Level of Investment decreases Withdrawals > Injections Withdrawals > Injections AD decreases x 2 Shift to the Left Output Decreases, Unemployment Rises, Inflation may fall
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24. Interest rates Quantity of money MD At high interest rates , demand for transaction money M1 decreases. Q low People prefer less cash and more term deposits. At low interest rates people will happily increase transaction demand for money as opportunity cost of deposits is low. Increased willingness to spend. Q high
25. Interest rates Quantity of money MD MS shift to the left Increase in Base Rate Interest rate increases MS 1 Ir MS shift to the right Decrease in Base Rate Interest rate decrease
