2.6 DEMAND SIDE POLICIES

Question 1

Government Objectives

Answer 1

• Low inflation (CPI/CPIH)
• Low unemployment (Claimant Count/LFS)
• Economic Growth
• Current Account

Question 2

Two Demand Side Policies?

Answer 2

• Fiscal Policy
• Monetary Policy

Question 3

Monetary Policy

Answer 3

The manipulation by government of monetary variables, such as interest rates and the money supply to achieve its objectives.

Question 4

Role Of Bank Of England (Quantitative Easing)

Answer 4

• Bank of England operates monetary policy on an independent basis.
• The Monetary Policy Committee (MPC) of the B of E is made up of 5 employees of the bank and 4 expert economists. They set the B of E’s base rate and how quantative easing should be managed.
• The target for CPI is 2.0% and if it goes above 3.0% and below 1.0% the governor of the B of E has to write to the Chancellor of the Exchequer to explain the reasoning.

Question 5

Quantitative Easing (Monetary Policy)

Answer 5

The central bank buys financial assets (bonds) in exchange for money in order to increase borrowing and lending in the economy. They may buy government bonds from financial
institutions or commerical banks.

This reduces interest rates, as when the B of E buy more bonds from commercial banks, the increase in supply of money means banks are willing to offer lower interest rates on subsequent money that it lends. It lowers the cost of borrowing for the governement.

Question 6

Interest Rates (Monetary Policy)

Answer 6

THE RATE OF INTEREST IS THE PRICE OF MONEY

Interest Rates Affect The Following:

• Purchase of consumer durables
• The housing market
• Wealth
• Saving
• Investment
• Exchange Rate

Question 7

Explanation On Monetary Policy

Answer 7

Expansionary monetary policy, or loosening of monetary policy works through lowering interest rates or increasing quantative easing. AD increase.

Contractionary monetary policy, or a tightening of monetary policy, works through increasing interest rates or reducing quantative easing. AD decrease.

Question 8

Fiscal Policy

Answer 8

-AD is also affected by the government expenditure, taxation and borrowing.
-Budget deficits mean the government have to borrow money leading to national debt.
-The government has many choices to make regarding spending, taxation and borrowing.
- These are announced in March in the Budget and in November in the Autumn Statement.
- The financial year runs from 6th April to the 5th April.

• Indirect taxes are levied on consumption.
• Direct taxes are levied on income or profits.
• A rise in budget deficit = rise in AD (expansionary fiscal policy)
• A decrease in budget deficit = decrease in AD (contractionary fiscal policy)

Question 9

Weaknesses Of Demand Side Policy

Answer 9

• Time lag
• Hard to fine tune