2.6.2 Demand side policies

Question 1

What is meant be ‘monetary policy’?

Answer 1

involves using interest rates, money supply, exchange rates to influence the level of consumer spending and aggregate demand

Question 2

What is meant by the ‘base rate’?

Answer 2

interest rate set on loans by monetary policy committee of the BoE

Question 3

Which economic agent is responsible for conducting monetary policy?

Answer 3

MPC - Monetary policy committee

Question 4

How often do they meet to adjust base rates?

Answer 4

every 6 weeks

Question 5

Which economic indicators might be consulted before deciding on a change in base rate?

Answer 5

inflation

Question 6

Would interest rates need to be increased or decreased in order to tackle unemployment?

Answer 6

decreased

Question 7

What is quantitative easing?

Answer 7

injection of money into the money supply

Question 8

Does quantitative easing aim to increase or decrease the money supply?

Answer 8

increase

Question 9

What are government bonds?

Answer 9

specific type of security sold by government and firms

Question 10

Does QE involve buying or selling government bonds?

Answer 10

selling

Question 11

Give 3 limitations of monetary policy

Answer 11

• change in interest rates may effect the exchange rates
• time lags
• difficult to control

Question 12

What is fiscal policy?

Answer 12

involves government changing taxation and government spending to influence AD and a level of economic activity

Question 13

What would expansionary fiscal policy involve?

Answer 13

• tax cuts
• welfare payment cuts
• increase government spending on infrastructure

Question 14

How would expansionary shift AD?

Answer 14

shift to the right