2.6.2 Demand-side policies

Question 1

Define fiscal policy

Answer 1

Use of taxation, gov spending and gov borrowing to influence the economy

Question 2

Define Demand-side policies

Answer 2

Policies which aim to manipulate AD to achieve the macroeconomic objectives

Question 3

Define monetary policy

Answer 3

Use of interest rates and the money supply to affect AD - Ran buy the independent BoE.

Question 4

What is the aim of expansionary fiscal policy?

Answer 4

-To increase AD

Question 5

Give three examples of expansionary MPC

Answer 5

1-Increase inflation due to under target rate
2-Fall in nominal and real interest rates
3-Decrease unemployment
4-Boost growth

Question 6

Give three examples of contractionary MPC

Answer 6

1-Higher int rates on both loans and savings
2-Tightening of credit supply (loans harder to get)
3-Appreciation of exchange rates.

Question 7

How do interest rates influence AD as monetary policy?

Answer 7

1-Credit card interest rates fall and therefore cost of borrowing falls for consumers and there MPC is higher than MPS. Increased C

2-As central banks cut interest rates, saving become less rewarding therefore incentivising spending and borrowing.

3-Mortgage rates decrease therefore consumers more incentivised to take them out as lower cost of borrowing.

4-Interest rates decreasing on business loans leads to higher levels of investment via firms.

Question 8

What may be an impact in increased investment from businesses ?

Answer 8

A shift right in LRAS due to increasing qual and quantity of FOPs

Question 9

What are some aims of expansionary fiscal policy

Answer 9

-Boost growth
-Reduce unemployment
-Increase inflation

Question 10

Give examples of expansionary fiscal policy

Answer 10

• Reduction in income tax -> leads to increased C
• Reduction in corporation tax -> leads to increased investment due to retained profit
• Increased government spending -> increased AD

Question 11

What are the aims of contractionary fiscal policy?

Answer 11

• Reduce inflation
• Reduce budget deficit
• Redistribute income
  -Reduce current account deficit

Question 12

What are some CONS of expansionary fiscal policy

Answer 12

1- Demand pull inflation bc of increased C and high unemployment. Conf. of MEOs

2 - Current account deficit widening due to high C of imports.

3- Budget deficit increases due to high GOV spending, increase in gov debt -> welf. payments affect, higher taxation (RICARDIAN EQUIVLANCE)

Question 13

Describe a fiscal deficit

Answer 13

When total gov spending is higher than total gov revenue

Question 14

Describe a fiscal surplus

Answer 14

When gov revenue is higher than gov spending.

Question 15

What is a discretionary fiscal change

Answer 15

Deliberate changes in direct and indirect taxation

Question 16

What is an automatic stabiliser

Answer 16

Changes in tax revenues and gov spending that come about automatically as economy moves through business cycle