Economics And The MPC

3 Pages 774 Words

Scheherazade Daneshkhu’s article on the growing problem of fiscal policy in Great Britain can be examined in the classical way in order to increase understanding of the problem. Daneshkhu thoroughly discusses the problems with the policy as well as the effects it has had on the housing market.
Fiscal policy in Great Britain has taken an unfavorable downturn, increasing both the price of houses and decreasing interest rates. By ignoring the problem of Britain’s loose fiscal policy, the government is looking at an unstable financial future and this problem will continue to grow and the economic out look for the country will become very weak; “ The economy is unbalanced and the housing market is threatening to reaccelerate. Whenever the MPC raises rates, sterling responds by rising and the economic outlook suddenly looks even weaker,” (Daneshkhu par. 7). The government should have tried to control the market by imposing a limit on how much one borrower would be able to borrow depending on the size of the house they intended to buy. Had the government placed some sort of limit or been more cautious about loaning large sums of money, economic problems such as inflation and increased consumer debt may not have occurred. By reducing the interest rates, the MPC encouraged people to both buy and invest, which is necessary to keep the economy stable but this cheap borrowing led people to become out of control with the borrowing as well (Daneshkhu par 5).
When this article is recast in the classical method, it can be seen in each of the four pillars of the classical macro economic theory. In the Quantity Theory of Money concept practiced by the classical economist, it is seen that the velocity at which money comes in is equivalent to the price times the output divided by the money supply (Riddell et al 329). In relation to this article, the money supply of the citizens has changed because interest rates have decrease and when this occu...