3.2.4 Macroeconomic policy

Question 1

What is the monetary policy?

Answer 1

Involves the central bank taking action to influence the manipulation of interest rates, the supply of money and credit and the exchange rates.

Demand side policy which affects borrowing, saving, spending and investment, imports and exports

Question 2

What is the 2 types of monetary policy?

Answer 2

Contractionary: Reducing AD using high interest rates, restrictions on the money supply and strong exchange rate

Expansionary: Increasing AD using low interest rates, fewer restrictions on the money supply and a weak exchange rate

Question 3

What is the aim of monetary policy?

Answer 3

Price stability - low inflation, promoting economic growth and reducing unemployment

Question 4

How is the inflation rate targeted?

Answer 4

By the monetary policy committee of the Bank of England who set interest rates in order to meet the inflation target the government set which is 2% as measured by the consumer price index

Question 5

Define bank rate

Answer 5

The lowest rate at which the BOE will lend to financial institutions

Question 6

What is the fiscal policy?

Answer 6

Expansionary: increased AD by increasing gov spending or lowering taxes. Increased economic growth, reduced unemployment, increased inflation and a deficit in the current account of balance of payments
Contractionary: reduces AD by reducing gov spending or increasing taxes. Decreased economic growth, increased unemployment, reduced inflation and a surplus in the current account of balance of payments

Question 7

What is the aim of fiscal policy?

Answer 7

To stimulate AD and AS

Question 8

What are the 2 types of fiscal policy?

Answer 8

Reflationary: boosting AD by increasing gov spending or lowering taxes - budget deficit

deflationary: reducing AD by reducing gov spending or increasing taxes - budget surplus

Question 9

What is the aim of the supply side policy?

Answer 9

Expand the productive potential (LRAS) of an economy or to increase the trend rate of growth

Allows for more efficiency and productivity

Question 10

What is the interventionist supply side policy?

Answer 10

correct market failure through gov spending on education, subsidies, improving infrastructure and industrial policy