2.6

Question 1

Explain the role of demand-side policies

Answer 1

Demand-side policies focus on maintaining a sufficiently-high level of aggregate demand so that the demand for labour remains strong.

Question 2

Define Monetary Policy

Answer 2

Monetary policy is used by the government to control the money flow of the economy. This is done with interest rates and quantitative easing. This is conducted by the Bank of England, which is independent from the government.

Question 3

Explain the tools involved in monetary policy

Answer 3

Bank of England base rate
Quantitative easing

Question 4

Explain the role of the Bank of England’s Monetary Policy Committee (MPC)

Answer 4

Control the monetary policy in the Uk
Monetary Policy Committe (MPC) makes decisions

Question 5

Explain the factors (6) that the MPC consider when setting base rate

Answer 5

1. Unemployment level - due to poor output gap
2. The strength of the £ - it will become stronger - can we afford for this to happen?
3. Consumer debt + 4. Business debt - How high it already is. If already high could make unstainable
4. Housing market - higher intrest rates will lower the housing prices
5. Growth - Could be unstainable (for inflation)

Question 6

Explain how a rise in the Bank of England’s base rate might lead to a fall in the rate of inflation

Answer 6

BOE raises base rate
This increases the cost of retail banks borrowing from BOE
Retail banks raise their own intrest rates
Higher intrest rates encourage saving and discourages spending and investment
Less spending reduces the amount of aggregate demadn in an economy
This reduces the upward pressure of prices

Question 7

Explain how the use of Quantitative Easing might lead to greater real output and higher inflation. Example - BOE wants to stimulate spending

Answer 7

Example BOE wants stimulate spending
1. BOE electronically creates money
2. BOE buys securities such as gov bonds from banks
3. Banks more influence to lend to firms and individuals as they have greater liquidity as securities paying less intreset
4. Greater lending boosts C+I and so AD
5. BOE should sell bonds after recovery to avoid long term inflation.

Question 8

Explain the different elements affected by inceasing intrest rates

Answer 8

disposable income falls, mortgage repayments rises (consumption falls)
Savings rise (Consumption falls)
Consumer loans more expensive (Consumption falls)
Business loans more expensive ( Investment falls)
Imports and exports (exports fall, imports rise)
Houses/assets - negative wealth effect (house prices fall)

Question 9

What are the limitations/problems of using monetary policy

Answer 9

1.Banks dont always pass on intrest rate cuts to customers
2. Intrest rate changes are not effective at very low rates ( no change in behaviour)

Question 10

Limitations/ problems of quantitative easing

Answer 10

Banks re-invested their money into assets (property, shares etc) + not always consumer, business loans
Value of assets rise, wealth effect rise for rich (those who own assets) thus inequality rises.

Question 11

explain the tools involved in fiscal policy

Answer 11

Gov spending, Direct+indirect taxation and Government borrowing

Question 12

Explain with examples what a direct tax is

Answer 12

A tax levied directly on individuals + on companies
eg. income tax, corporation tax and inheritance tax

Question 13

Explain with examples what an indirect tax is

Answer 13

A tax levied on goods and services
eg. VAT, excise duties and air passenger duty

Question 14

Explain the distinction between a gov budget deficit and surplus

Answer 14

If gov spends more than it receives in taxation, this is known as a fiscal policy or budget deficit. This will lead to an increase in AD. If the gov spends less than it receives from taxation, this is known as a fiscal or budget surplus. This will decrease AD

Question 15

Explain the difference between automatic stabilisers and discretionary fiscal policy

Answer 15

Automatic stabilisers occur when in a recession a gov automatically spends more because there are more claiming unemployment benefits whilst discretionary fiscal policy is an deliberate attempt by the gov to stabilise the economy through spending+tax

Question 16

Explain how automatic stabilisers affect the level of actual GDP throughout the economic cycle

Answer 16

Automatic stabilizers, such as unemployment benefits, boost the economy during a recession and act as a brake on growth during a boom to stabilize economic activity without government action

Question 17

Explain how discretionary spending can be used in a recession to stimulate AD

Answer 17

Increasing gov spending increases AD ceteris paribus.
Decreasing taxes= increased consumer spending

Question 18

Explain how expansionary fiscal policy influences the level of AD

Answer 18

Greater gov spending
Lower taxes
Increase in a budget deficit, decrease in a budget surplus
= increase in AD

Question 19

Explain how contractionary fiscal policy influences the level of AD

Answer 19

Less gov spending
Higher taxes
Decrease in a budget deficit/ increase in a budget surplus
= decrease in AD

Question 20

Explain the limitations of/problems of using fiscal policy

Answer 20

Time lags- when the gov makes spending+taxation decisions, there is a time lag before the effects are seen
Trade off- If the gov tries to influence AD, it cant chieve all the macroeconomic objectives simultaneously eg increase in AD leads to decrease in unemployment but increase in inflation
Imperfect data - The gov cant possible know every precise aspect of the economy so its decisions may lead to gov faliure

Question 21

Explain the role of supply-side policies

Answer 21

Increase the level of output without causing inflationary pressures

Question 22

Explain the distinction between market-based and interventionist methords

Answer 22

Market based- remove barriers to make markets work effectively eg barriers to innovation and barries to workers being willing to take jobs
Inventionis- designed to correct market faliures eg- intervining to provide education (positive externalities), encouraging investment when markets lead to too little

Question 23

Example of market based policy to increase incentives + how does it lead to an increase in the productive potential of the economy + limitation/problem

Answer 23

Lower business taxes to stimulate investment and lower income taxes to improve work incentives
Lower business taxes give firms greater retained profits with which to invest and greater reward for doing so
Greater investment leads to greater capital stock
Lower income taxes increase incentive to take paid work for those on unemployment benefits
More people in work, the more the productive potential
Evaluation:
Could mean having to raise other taxes or cutting spending further
May not be compatible with cutting budget deficit

Question 24

Example of market based policy to promote competition + how does it lead to an increase in the productive potential of the economy + limitation/problem

Answer 24

Privatisation of state assets (selling off public sector businesses into the private sector)
Based on view that private sector firms are more efficient due to profit maximising objective
Privatisation allows firms that might be wasteful and inefficient to have a financial incentive to cut costs and improve efficiency
Evaluation:
If privatisation simply leads to a private monopoly then they may lack competition and lack incentive to be efficient

Question 25

Example of market based policy to reform the labour market + how does it lead to an increase in the productive potential of the economy + limitation/problem

Answer 25

Improving labour market flexibility
Reforming employment laws to allow businesses to hire and fire more easily
Reducing trade union powers to increase efficiency (less time lost to industrial action)
Evaluation:
Reduced job security for workers may be seen as undesirable
Impact on productivity is unclear?
Lower motivation leading to lower productivity
Greater insecurity leading to workers being harder working

Question 27

Explain how supply-side policies can help reduce unemployment

Answer 27

Provide workers with additional skills+education
Subsidise relocation
Provide workers with more info on job opportunites

Question 28

Explain how supply-side policies can help reduce inflation

Answer 28

AN expansion in LRAS leads to a fall in the preice level because of improvements in efficiency + productivity helps to lower business costs

Question 29

Evaluate limitations/problems of supply side policies

Answer 29

Time lags- May be a long time between implementing a policy+ seeing the benefits
Resistance- Market based policies aiming to lower the power of monopolies or trade unions may be met with oppositions leading to disputes or legal challeneges in the short run
Cost- policies may be expensive to the government - spending on education, infrastructue etc is much more costly to the gov than monetary policy
Equity- Some policies aimed at reducing benefits have an obvious impact on the poorest in society in the short run. Other supply side policies like privatisation and lower tax rates can be argued to have helped increase inequality over time

Question 30

Explain how supply-side policies can help reduce a current account deficit

Answer 30

Supply side policies can improve the competitiveness of the economy and help make exports more attractive. This can improve the current account position, but it may take considerable time to have an effect.

Question 31

Explain how economic growth and low inflation might trade-off using diagram + 2 evaluations

Answer 31

As AD keynesian graph. Increased economic growth leads to increased inflation when AD is close to full employment
However, If there is a period of poor economic environment (recession) leads to no inflation
Also, If growth is supply side then changes cause decreased inflation but still increased growth

Question 32

Explain how low unrmployment and low inflation might trade-off + evaluation

Answer 32

Philips curve shows as unemplyment falls, a shortage of labour means workers bargaining position is stronger - allows workers to claim higher wages leads to higher business costs thus causing higher prices
However, If growth comes from increased as and not increased ad then there will be less unemployment but inflation is likely to fall

Question 33

Explain how economic growth and a balanced current account might trade off

Answer 33

Economic growth leads to increased incomes which causes higher spending on imports by consumers.
However If growth is export led then an increase in exports will caise a balance of trade surplus causing increased AD and increased growth.

Question 34

Explain how economic growth and a reduction in the budget deficit might trade-off + evaluation

Answer 34

Decreased budget defict trade off with either-
increased tax causing decreased consumption and investment and thus decreased ad
or decreased gov spending also causing decreased ad (or both)
However, If start from increased growth:
then gov gets more tax revenue as incomes are higher thus causing a decreased budget deficit.
also, increased employment thus less money spent on welfare beneits and so a decreased budget defecit

Question 35

Explain how the economic growth and the enviroment might trade-off

Answer 35

Increased growth leads to depletion of natural resources and the increased production causing increased energy and thus increased pollution.
However, If growth is tech driven then there will likely be an increase in green tech and re-newable energy eg electric vehicles