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AS Economics > 2.6.2 Demand side policies > Flashcards

2.6.2 Demand side policies Flashcards

1
Q

what are the two types of economic policies?

A
  • demnd side policies (affect AD)
  • supply side policies (affect AS)

aim to control the business cycle and acieve 7 macro objectives

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2
Q

what are the side effects of demand side policies?

A

although intended to affect AD also affect AS
eg:

ALL policies have both supply side effects as well as demand side effect

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3
Q

what are demand side policies?

A

goverment policies which aim to influence aggregate demand

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4
Q

what are the two types of demand side policies?

who are they managed by

A
  • fiscal policy (goverment )
  • monentary policy (B of E )
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5
Q

what two things do the central bank manipulate in monetary policy?

A
  1. base intrest rate
  2. money supply

in oreder to infulence AD

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6
Q

what is the base intrest rate?

A

the intrest rate set by the central bank which impacts other commericial banks

infulences commerical intrest rates to consumers

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7
Q

what is the central bank?

A

the bank of banks

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8
Q

who are the monetary policy commitee?

A

a group of 8 economist and governer (9 total)
* job is to keep inflation rate at 2% goal
* every few weeks decide monetary policy

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9
Q

what does is expansionary monetary policy

A

decrease base intrest rates (inflation is below target )
* consumers will be encouraged to spend more and save less
* consumption (60% ) will increase, increasing AD
* deand pull inflation

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10
Q

what is contrationary monetary policy?

A

increase in base intrest rates ( inflation rate above target)
* consumers encourages to save more and spend less
* consumption (60%) will decrease, AD will decrease
* decrease in inflation

contracts the economy

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11
Q

define monetary policy

A

when the central bank changes the base intrest rate or the money supply in order to influence aggregate demand

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12
Q

define base intrest rate

A

the intrest rate set by the bank of england, showing the rate at which they will lend money to highstreet banks

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13
Q

define expansionary monetary policy

A

decreasing the base intrest rate or increasing the money supply in order to increase aggregate demand and increase the rate of inflation

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14
Q

define contractionary monetary policy

A

increasing the base intrest rate or decreasing the money supply in order to increase aggregate demand and decraese the rate of inflation

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15
Q

what are the 4 things that base intrest rates affect?

A
  • savings
  • investment
  • mortgage
  • (net) exports
    SIME
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16
Q

what are the effects of cutting the base intrest rates? (savings)

evaluation point

A
  • discourage saving and encourage spending
    increase in (MPC), increase in consumption
  • 1 in 6 people are pensioners who rely on return from their savings, less disposable income/ consumption
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17
Q

what are the effects of increasing the base intrest rate? (savings)

evaluation point

A
  • encouraged saving instead of spending , MPC decreases, MPS increases, AD decreases
  • 1 in 6 are pensioners, rely on return from savings as income, so they will have more disposable income
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18
Q

what are the effects of cutting the base intrest rates? (mortgages)

evaluation point

A
  • mortagages become more affordable, more demand for housing, increased house prices, positive wealth affect , increased AD
    *

wealth affect 0 in european countries (evaluation)

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19
Q

what is the effect of higher intrest rates on mortgages?

A
  • less people can afford, demand for housing will decrease, house prices will decrease, negative wealth affect
  • wealth affect neutral in european countries

increased price of borrowing, contractionary

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20
Q

what is the effect of lower intrest rate on investment?(demand side effects and supply side effects)

A
  • cost of borrowing has decreased
  • incentive for firms to borrow money to invest in capital
  • demand side effect: increase in AD as increase in investment
  • supply side effect: increase in LRAS as an increase in productivity from new machinary
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21
Q

what is an evaluation point to there being a cut in intrest rates and the effect of this on investment?

A

However, this may not happens as if animal spirits are low, then firms may be worried that they may not even be able to meet the small cost of borrowing and go bankrupt. Therefore, invesmtent will not necessiarily increase

22
Q

what is the effect on investment when there is a increase in intrest rates?

A
  • increased cost of borrowing= decreased incentive for firms to take out loan and invest in capital, decraese in investment, decrease in AD, decrease in price level controlling inflation
  • for firms that choose to invest, increased cost borrwoing, increase in firms costs, decreased SRAS passed down to consumers by an increase in prices, cost push inflation , against the point of the monetary contrationary policy
23
Q

what is the effect on the pound of increasing the base intrest rate?

A

since there is a higher return on savings
* an increase in demand foreign will increase the value of the pound (appreciate)

24
Q

what is the effect of increasing the base intrest rate on imports and exports?

A
  • stronger pound= imports cheaper
  • increased import expenditure, decreased export income, net trade will decrease
  • worsening current account balance
25
Q

evaluation point for increase in base intrest rate effects on imports and exports

A

the UK in a net importer of raw materials
* reduction in cost for firms who import raw materials
* lower prices make the firms internationally more competitive
* incraesed demand for exports and increased export revenue
* UK consumers may find it cheaper to buy dometic goods than international, decraesing import expenditure

improving the current account deficit

26
Q

what is the effect of decreasing the intrest rates on the value of the pound?

A

a decrease in the value of the pound, less return and so less demand from foreign investors

27
Q

what is the effect of decreasing the base interest rate on imports and exports?

A
  • decreased value of the pound
  • decraesed import expenditure, increased export revenue
  • increased in net trade and AD, economic growth
  • improving the current account balance
28
Q

what is the evaluation point for the effect of decreasing the base intrest rate on imports and exports?

A
  • However, the UK is a net importer of raw materials imports become more expensive so firms have to increase their prices
  • decreasing international competitivness, decrease in export revenue
  • less consumers would buy domestic goods over foreign goods as they are more expesnive, increase in import expediture
  • worsening the current acount deficit
29
Q

what is the zero lower bound?

A

intrest rates cannot be negative so lowest interest rate possible is 0

when close to zero banks use quantitive easing

30
Q

what is quantitative easing?

A
  1. the central bank makes electronic money
  2. they then buy financial assets such as bonds from high street banks
  3. this increases high street banks supply of money,increasing amount that they can lend

an expansion monetary policy

31
Q

what are the two effects of quantitative easing?

A
  1. increase in AD from increase in consumption and investment
  2. depreciation of pound, net trade will increase, increase in AD
32
Q

what are the negative consequences of quantitative easing?

A
  • increase in AD, increase in price level = demand pull inflation
  • inflation effects may outweigh increase in real GDP
33
Q

what is fiscal policy?

A

changing tax and goverment spedning to influence the economy

34
Q

what is expansionary fiscal policy?

loose fiscal policy

A

when gov decrease taxes and increase government spending in order to increase AD

worsening the budget deficit

35
Q

what is contractionary fiscal policy?

A

when the government increases tax abd decreases government spending in order to decraese AD

36
Q

expansionary fiscal policy (chains of analysis)

A

(expansionary fiscal policy)
1. increase in government spending–> increase in injections
2. decrease in taxes —-> decrease in withdrawals
3. injections> withdrawals so the circular flow of income expands, expandning the economy
4. worsening the government budget deficit

37
Q

lower income tax (chains of analysis)

A
  • higher dispoable income , increase in consumption increase in AD. Firms make more sales and profit, increase in investment, increase in AD
  • increase in corporation tax and VAT revenues will increase government spending, increase in AD
  • as firms expand, derived demand for labour increases, more jobs, more incomes and more spending ….
38
Q

lower income tax (evaluataion)

A
  • cut in income tax, less revenue, less to spend on benefits, healthcare, education. Government spendning decraesimg will decrease AD
39
Q

higher income tax (chains of analysis)

A

(contractionary fiscal policy)

  • helps bring down the inflation rate
  • decraesed budget deficit
  • can spend on other things
40
Q

higher income tax (evaluation points)

A
  • may decrease incentive to work, less hours worked, quanity of labour (LRAS)
  • migrate away to countries where income tax = 0%, no income tax at all
  • using clever accountants to avoid the income tax
41
Q

higher benefits (chains of analysis)

A

(expansionary fiscal policy)
* increase C (not GS ) for low income workers–> economic growth
* decrease in income inequality

42
Q

define benefits

A

payments or transfers made by the government to low income or unemployed workers

43
Q

higher benefits (evaluation)

A
  • if benefits too high –> benefits trap:
  • reduced incentive for unemployed people to work, increase in unemployment
44
Q

what is the benefits trap?

A

when benefits get too high and unemployed workers are actually better off staying unemployed and claiming benefits than working

45
Q

lower benefits (chains of analysis)

A

(contractionary fiscal policy)
* reduction in consumption–> lower inflation
* decrease in budget defict
* increased incentive to work –> lower unemployment

46
Q

lower benefits (evaluation)

A
  • those who are poor get poorer–> increase in income inequality
  • decrease in consumption (not GS ) —> decrease in economic growth
47
Q

higher corporation tax (chains of analysis)

A

(contractionary fiscal policy)
* reduced government budget deficit
* increased government spendning–> economic growth

48
Q

what is corporation tax?

A

tax paid on firms profits

49
Q

higher corporation tax (evaluation)

A
  • decrease in I, decrease in AD
  • reduce investment in capital –> depreciation in qualit productivity–> less LRAS
50
Q

lower corporation tax (chains of analysis)

A
  • (supply side) decrease in costs, SRAS shift to the right
  • increase in investment–> more productive capital –> LRAS shifts out
  • increase in investment, increase in AD

AS Economics (24 decks)

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