2.6.2 Demand-side Policies

Question 1

What are demand-side policies?

Answer 1

Any deliberate action taken by governments or monetary authorities to shift the aggregate demand curve

Question 2

What are the 2 types of demand-side policy?

Answer 2

• Monetary policy

- Fiscal policies

Question 3

What is a Monetary policy

Answer 3

The manipulation of monetary variables in order to achieve government objectives

Question 4

What is a Fiscal policy

Answer 4

The manipulation of government spending and taxation in order to change aggregate demand

Question 5

What are the Monetary policy instruments?

Answer 5

• Interest rates

- Asset purchase

Question 6

What happens to interest rates if aggregate demand needs to decrease?

Answer 6

• Interest rate is raised
• Meaning that C, I and (X - M) will tend to fall
• The AD shifts to the left
• Multiplier effects increase the impact of change

Question 7

What happens to interest rates if aggregate demand needs to increase?

Answer 7

• Interest rate is cut
• Meaning that C, I and (X - M) will tend to rise
• The AD shifts to the right
• Multiplier effects increase the impact of change

Question 8

What is the interest rate set by?

Answer 8

The Monetary Policy Committee (MPC) of the bank of England

Question 9

Why are Asset purchases used by banks?

Answer 9

To help to stimulate the economy when standard monetary policy is no longer effective

• this has inflationary effects since it increases the money supply
• can reduce the value of the currency.

Question 10

What’s Quantitative Easing (QE)?

Answer 10

A method to pump money directly into the economy.

Question 11

When is Quantitative Easing (QE) usually used?

Answer 11

Usually used where inflation is low and it is not possible to lower interest rates further.

Question 12

Who has used Quantitative Easing (QE)

Answer 12

Used by the European Central Bank to help stimulate the economy.

Question 13

What happens when demand for these asset increase?

Answer 13

• Price rises
• Which in turn means the dividend yield on them falls
• The amount of dividend relative to the price of the bond falls
• This is the same impact as cutting interest rates but has a direct effect on money markets
• Meaning the bonds are more usable in the markets
• Because people want to buy them, the holders of bonds know they can be sold
• Can mean money markets start working again, which is why Quantitative Easing (QE) is used in a credit crisis.