2.6.2 Demand-side policies Flashcards
Define fiscal policy
Use of taxation, gov spending and gov borrowing to influence the economy
Define Demand-side policies
Policies which aim to manipulate AD to achieve the macroeconomic objectives
Define monetary policy
Use of interest rates and the money supply to affect AD - Ran buy the independent BoE.
What is the aim of expansionary fiscal policy?
-To increase AD
Give three examples of expansionary MPC
1-Increase inflation due to under target rate
2-Fall in nominal and real interest rates
3-Decrease unemployment
4-Boost growth
Give three examples of contractionary MPC
1-Higher int rates on both loans and savings
2-Tightening of credit supply (loans harder to get)
3-Appreciation of exchange rates.
How do interest rates influence AD as monetary policy?
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.
What may be an impact in increased investment from businesses ?
A shift right in LRAS due to increasing qual and quantity of FOPs
What are some aims of expansionary fiscal policy
-Boost growth
-Reduce unemployment
-Increase inflation
Give examples of expansionary fiscal policy
- 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
What are the aims of contractionary fiscal policy?
- Reduce inflation
- Reduce budget deficit
- Redistribute income
-Reduce current account deficit
What are some CONS of expansionary fiscal policy
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)
Describe a fiscal deficit
When total gov spending is higher than total gov revenue
Describe a fiscal surplus
When gov revenue is higher than gov spending.
What is a discretionary fiscal change
Deliberate changes in direct and indirect taxation
What is an automatic stabiliser
Changes in tax revenues and gov spending that come about automatically as economy moves through business cycle
