2.6.2: Demand Side Policies Flashcards
What are the aims of demand side policies?
- to influence an economy’s aggregate demand to stabilise employment, price levels and output
What is the MPC and what does it do?
- Monetary Policy Committee, and they set the base rate of interest for the economy
What is monetary policy?
- Monetary policy is where the central bank (Bank of England) controls the level of AD by changing the base interest rate or the amount of money in the economy (quantitative easing)
What is fiscal policy?
Fiscal policy is the when the use of taxation, government spending and borrowing is used to control the level of AD
What is the impact of interest rate change?
A rise in interest rates causes a fall in AD.
- less consumption; most people use credit cards, higher interest rates means that consumers must give a higher return back to the bank
- Fall in prices of assets; therefore cause negative wealth effect
What is the effect of lowering the Bank Rate?
- If the Bank Rate was lowered, should lead to a lower LIBOR (which is the rate at which commercial banks lend/ borrow from each other).
- This then affects consumers as (in theory) banks could decrease mortgage rates/ loans
- this can shift AD/AS
How do decreases in interest rates affect the housing market and consumption?
- Mortgages become cheaper
- Therefore the demand for housing increases (housing market booms)
What is quantitative easing?
- A form of monetary policy where the central bank purchases securities on the open market to achieve a desired income.
What is a budget deficit?
- when the government spends more than what they receive in taxes
What is a budget surplus?
- when the government receives more in tax than what they spend
What are direct taxes?
- Direct taxes are taxes that are directly paid to the government
- taxes directly from income or taxes on businesses
- eg income tax, corporation tax
What are indirect taxes?
- taxes charged on the producers of goods and services and is paid by the consumer indirectly
