2.6.2, 2.6.3 Supply + Demand side policies Flashcards
What is base interest rate
The rate at which the central bank will lend to highstreet banks
What is monetary policy
When the central bank manipulates the base interest rate or money supply in order to influence AD.
What are fixed term ISA interest rates
Interest offered by central banks on reserves of commercial banks.
What are overdraft interest rates
High, daily interest rates charged on negative bank balances.
What are easy access saving rates
Tax free interest rates offered to savings where customers cannot withdraw money befores savings mature.
What are mortgage rates
Interest rate charged on customers when they borrow using their houses as collateral
What is policy interest rate
Interest Paid on cash saving where depositors can withdraw anytime, typically lower than fixed term interest rates.
What are interbank interest rates
Interest rates charged when banks borrow from one another.
What is fiscal policy
A demand side economic policy controlled by the government
What does fiscal policy involve changing (2)
tax rates and/or government spending
expansionary fiscal policy involves
↑Government spending and↓Tax rates
expansionary monetary policy involves
↓ interest rates, ↑ spending
What are goals of monetary policies(2)
Maintain low and stable inflation (2% +- 1)
Support growth and employmen
What are the processes involved in Quantitative easing
(5)
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.
What are the limiations of QE
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.
What are the major types of government spending(5)
Current expenditure
Capital expenditure
Pensions (transfer payments)
Foreign aid
Public debt interest
What is the crowding out effect
At full employment: increasing government spending ‘crowds out’ private spending
Direct tax
levied on income, wealth and profit. Examples, Income tax
Indirect tax
Levied on spending on goods and services. Examples, VAT
What is progressive tax
High income earners pay proportionally more of their income than low income earners. Tax rate ↑ as Income ↑
What is regressive tax
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 ↓
What is proportional tax
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.
What are automatic stabilisers
Automatic changes in tax revenues and unemployment benefits at different stages of a business cycle.
Contractionary fiscal policy involves
Increasing tax rates; or
Reducing government expenditure
What is austerity
Objective of reducing budget deficit, national debt under periods of recession.
what is fiscal drag
Income tax allowance and tax brackets frozen
People pay more taxes and more people are dragged into the 20% basic tax rate.
What are the two types of SupplySidePolicies
Interventionist ssp’s
Market based ssp’s
How do interventionist ssp’s raise LRAS
Government intervention to raise LRAS by correcting market failures.
In what ways do market based ssp’s raise LRAS (3)
↑Competition
↑Incentives
↑efficiency
What are the goals of supply side policies
increase/raise LRAS
What are the limitations of interventionist ssp’s (4)
Crowding out
Expensive
Inefficient and bureaucratic
Time lag
