3.2.3 Flashcards
What is the monetary policy?
Central banks use of interest rates, money supply or exchange rates to influence the level of aggregate demand in the economy.
What is money supply?
The sum of notes, coins and deposits in banks and financial institution.
What is the base rate?
The interest rate set by the Bank of England that influences market interest rates.
Formula for AD
AD= consumption + investment + government spending + ( exports - imports )
What are 3 pros of fiscal policy?
1.It can be directed at specific areas of spending such as education
2.Although it can lead to national debt and budget deficit, it is not always a problem as long as it is an acceptable amount of GDP.
3.Can use green taxes to protect the environment and to promote sustainable economic growth.
What are 3 cons of fiscal policy?
1.It can suffer from knowledge problems as GDP is inaccurate
2.Committed spending promises can lead to budget deficits and increasing national debt.
3.It most of the time won’t take place in education and major infrastructure projects as the government will not see the benefit.
What are 3 pros of monetary policy?
1.It can be very flexible in terms of time as they meet every month
2.It does not incur government budget deficits and is not influenced by political pressure
3.An expansionary policy where interest rates are reduced can lead to an increase in exports due to the depreciation in the pound.
What are 3 cons of monetary policy?
1.This policy suffers on knowledge problems as the MPC rely on the same data as the government.
2.It is inflexible so it cannot target specific areas of the economy and it takes around 18 months for a response in the economy to arise
3.It may discourage investment especially in the private sector, decreasing AD.
What is fiscal policy?
The use of taxation and government spending to influence the economy.
What is contractionary fiscal policy?
Attempts to slow the economy, not make it smaller.
What is expansionary fiscal policy?
Attempts to stimulate/grow the economy.
What is the government budget?
The governments plan for spending and tax.
What is national debt?
The cumulative amount of money owed by a country.
What are direct taxes?
Taxes on income and wealth e.g. income tax, corporation tax, inheritance tax, capital gains tax.
What are indirect taxes?
These are taxes put on things where the supplier can pass the burden onto the final consumer depending on the ped of the product e.g. VAT, council tax, stamp duties and business rates
What are 3 pros of indirect tax?
1.They can be used as a means of making the polluter pay and internalising the external costs.
2.They are less easy to avoid
3.They can be changed more easily than direct takes so it gives more flexibility.
What are 3 cons of indirect taxation?
1.Many indirect taxes make the distribution of income more unequal because of regressive effects
2.Higher indirect taxes can cause cost-push inflation which leads to a rise in inflation
3.They can be uncertain revenue-wise especially in times of recession with low consumer spending
What is regressive tax?
Tax as a percentage of a product e.g. VAT, the poor pay more
What is progressive tax?
The more you earn, the higher % you pay.
What is proportional tax?
It is a fixed % for all, NIC as an example.
What is a balanced budget?
Where government income = government expenditure
What is a budget?
Government income and expenditure for a 1 year period.
What is a budget deficit?
Where government spending exceeds tax revenue.
What is a budget surplus?
Where tax revenue is greater than government spending.
