2.6.2 - Demand - Side Policies Flashcards
What Is The Aim Of Demand Side Policies?
Influences AD in an economy.
What Are The 2 Categories Of Demand Side Policies?
~ Fiscal policy.
~ Monetary policy.
Describe Fiscal Policy
(4 Points)
~ Managed by the government.
~ Involves adjusting tax and government spending, to influence AD.
~ Can be in the form of expansionary and contractionary fiscal policy.
~ The bigger the multiplier, the bigger the impact on AD.
What Is Expansionary / Loose Fiscal Policy?
(4 Points)
~ Increasing government spending and lower taxes.
~ Expanding the economy.
~ Worsens the budget deficit, as the government is spending more than it receives.
~ Can cause crowding out.
What Is Crowding Out, As An Effect Of Expansionary Fiscal Policy?
(3 Points)
~ Increased government spending leads to a reduction in private sector spending or investment.
~ As when the government demand more, it increases interest rates.
~ E.g. HS2.
What Is Contractionary / Tight Fiscal Policy?
(3 Points)
~ Decreasing government spending and increasing taxes.
~ Contracting the economy.
~ Improves the budget deficit, as more money is coming in then the government is spending.
What Are Direct Taxes?
(2 Points)
~ Taxes payed directly to the government
~ E.g. Income, corporation and capital gains tax.
What Are Indirect Taxes?
(2 Points)
~ Taxes imposed on the spending of goods and services.
~ E.g. VAT and specific taxes.
What Taxes Will The Government Alter, To Influence AD, When Implementing Fiscal Policy?
(3 Points)
~ Income tax.
~ Corporation tax.
~ VAT.
What Types Of Government Spending Will The Government Alter, To Influence AD, When Implementing Fiscal Policy?
(3 Points)
~ Healthcare spending.
~ Education spending.
~ Infrastructure spending.
What Are The Problems With Implementing Fiscal Policy?
(5 Points)
~ Demand pull inflation.
~ Current account deficit.
~ Budget deficit.
~ Crowding out.
~ Time lags.
Describe Monetary Policy
~ Managed by the central bank.
~ Involves manipulating interest rates and the money supply, to influence AD.
~ Can be in the form of expansionary and contractionary monetary policy.
What Is Expansionary Monetary Policy?
(3 Points)
~ Decreasing interest rates.
~ Expanding the economy, due to more consumption and investment.
~ Used to increase inflation if it gets too low.
What Is Contractionary Monetary Policy?
(3 Points)
~ Increasing interest rates.
~ Contracting the economy, due to less consumption and investment.
~ Used to reduce inflation if it gets too high.
If The Interest Rate Was To Change, What Would Be Affected Within The Economy?
(5 Points)
~ Savings.
~ Mortgages.
~ Investment.
~ Exports.
~ Imports.
What Are The Impacts Of Altering The Interest Rates, In Monetary Policy?
(4 Points)
~ Current account deficit.
~ Demand pull inflation.
~ Negative impacts on savers.
~ Time lags.
Describe Quantitive Easing
(3 Points)
~ Occurs when the base interest rate, gets close to 0.
~ When the central bank buys financial assets from high street banks, giving money to the banks.
~ Increasing the money supply, meaning banks have more money to lend out.
What Is The Impact Of Quantitive Easing?
(3 Points)
~ Increases consumption and investment.
~ Depreciates the currency, due to increase supply of the currency, decreasing its value.
~ Affecting export and imports.
What Are The Problems With Using Quantitive Easing, In Monetary Policy?
(2 Points)
~ Risk of hyperinflation, due to pricing increasing.
~ High inflation can be caused.
What Is A Budget / Fiscal Deficit?
When government spending is more than the tax revenue it receives.
What Is A Budget / Fiscal Surplus?
When government spending is less than the tax revenue it receives.
What Is A Balanced Budget?
When government expenditure = government revenue.
What Is The Role Of The Monetary Policy Committee?
(2 Points)
~ Control monetary policy by, setting the base interest rate and discussing QE.
~ Try to keep inflation at its target of 2% +/- 1%.
