2.6.2, 2.6.3 Supply + Demand side policies

Question 1

What is base interest rate

Answer 1

The rate at which the central bank will lend to highstreet banks

Question 2

What is monetary policy

Answer 2

When the central bank manipulates the base interest rate or money supply in order to influence AD.

Question 3

What are fixed term ISA interest rates

Answer 3

Interest offered by central banks on reserves of commercial banks.

Question 4

What are overdraft interest rates

Answer 4

High, daily interest rates charged on negative bank balances.

Question 5

What are easy access saving rates

Answer 5

Tax free interest rates offered to savings where customers cannot withdraw money befores savings mature.

Question 6

What are mortgage rates

Answer 6

Interest rate charged on customers when they borrow using their houses as collateral

Question 7

What is policy interest rate

Answer 7

Interest Paid on cash saving where depositors can withdraw anytime, typically lower than fixed term interest rates.

Question 8

What are interbank interest rates

Answer 8

Interest rates charged when banks borrow from one another.

Question 9

What is fiscal policy

Answer 9

A demand side economic policy controlled by the government

Question 10

What does fiscal policy involve changing (2)

Answer 10

tax rates and/or government spending

Question 11

expansionary fiscal policy involves

Answer 11

↑Government spending and↓Tax rates

Question 12

expansionary monetary policy involves

Answer 12

↓ interest rates, ↑ spending

Question 13

What are goals of monetary policies(2)

Answer 13

Maintain low and stable inflation (2% +- 1)
Support growth and employmen

Question 14

What are the processes involved in Quantitative easing
(5)

Answer 14

central banks create electronic money,

make large scale purchases of government and corporate bonds.

Commercial banks receiving cash are encouraged to lend money.

Buying bonds pushes up prices of bonds and lowers bond yields.

This lowers borrowing costs and encourages consumption and investment.

Question 15

What are the limiations of QE

Answer 15

QE widens wealth gap as

QE caused sharp rise in prices of houses and financial assets
Homeowners and people with large portfolio benefi the most.

Question 16

What are the major types of government spending(5)

Answer 16

Current expenditure
Capital expenditure
Pensions (transfer payments)
Foreign aid
Public debt interest

Question 17

What is the crowding out effect

Answer 17

At full employment: increasing government spending ‘crowds out’ private spending

Question 18

Direct tax

Answer 18

levied on income, wealth and profit. Examples, Income tax

Question 19

Indirect tax

Answer 19

Levied on spending on goods and services. Examples, VAT

Question 20

What is progressive tax

Answer 20

High income earners pay proportionally more of their income than low income earners. Tax rate ↑ as Income ↑

Question 21

What is regressive tax

Answer 21

Marginal and average tax rates decrease as taxable income increases. High income earners pay proportionally less of their income than low income earners. ↓Tax rates as Income ↓

Question 21

What is proportional tax

Answer 21

Marginal and average tax rates remain constant as taxable income increases. High income earners pay the same proportion of their incomes as low income earners.

Question 22

What are automatic stabilisers

Answer 22

Automatic changes in tax revenues and unemployment benefits at different stages of a business cycle.

Question 23

Contractionary fiscal policy involves

Answer 23

Increasing tax rates; or
Reducing government expenditure

Question 24

What is austerity

Answer 24

Objective of reducing budget deficit, national debt under periods of recession.

Question 25

what is fiscal drag

Answer 25

Income tax allowance and tax brackets frozen
People pay more taxes and more people are dragged into the 20% basic tax rate.

Question 26

What are the two types of SupplySidePolicies

Answer 26

Interventionist ssp’s
Market based ssp’s

Question 27

How do interventionist ssp’s raise LRAS

Answer 27

Government intervention to raise LRAS by correcting market failures.

Question 28

In what ways do market based ssp’s raise LRAS (3)

Answer 28

↑Competition
↑Incentives
↑efficiency

Question 29

What are the goals of supply side policies

Answer 29

increase/raise LRAS

Question 30

What are the limitations of interventionist ssp’s (4)

Answer 30

Crowding out
Expensive
Inefficient and bureaucratic
Time lag