4.2 Economic policy

Question 1

What is an economic policy?

Answer 1

Actions of a government in a country that intend to influence economic behavior of individuals and firms to achieve certain outcomes.

Question 2

Fiscal policy

Answer 2

Decisions that the government makes relating to government spending & borrowing, and taxes.

main instrument: budget.

Question 3

Aims of fiscal policy

Answer 3

1. Maintain stable prices by managing demand and supply.
2. Stabilize and promote economic growth.
3. Lower unemployment by creating jobs.

Question 4

Influence of fiscal policy on demand

Answer 4

Fiscal policy can directly influence aggregate demand by adjusting government spending & taxes.

Question 5

What is aggregate demand?

Answer 5

In Keynesian economics, aggregate demand drives economic performance.
includes: what consumers spend on goods and services, investment of businesses on capital goods, government spending - tax, export - import.

Question 6

Monetary policy

Answer 6

Refers to the different measures that monetary authorities (South African Reserve Bank, and the National Treasury) take to influence money supply through changes in interest rates.

Question 7

Purpose of monetary policy.

Answer 7

Ensure price stability
economic growth
stability in balance of payments.

Question 8

How does monetary policy work?

Answer 8

• increase interest rates = borrowing becomes more expensive, therefore slow down economic activity.
• decrease interest rates = encourage borrowing and spending.

Question 9

Exchange rate policy

Answer 9

Decisions taken by SARB about matters relating to or to not intervene in foreign exchange market and how to intervene.

Question 10

Floating exchange rate.

Answer 10

In South Africa, supply and demand in foreign exchange market influences exchange rate.

Question 11

Industrial and trade policy

Answer 11

Decisions taken by minister - and Dept. of trade and industry.

Question 12

Aim of industrial policy

Answer 12

To stimulate demand for domestic production.

Question 13

Policy instruments of industrial policy

Answer 13

Import tariffs
Export- and employment subsidies
quotas

Question 14

Labour market policy

Answer 14

Measures taken by Dept. of labor to affect the functioning and outcomes of labor market.
To regulate employment conditions - working hours/ wages

Question 15

Aim of competition policy

Answer 15

to promote competition

Question 16

Competition policy

Answer 16

Measures taken by Competition Commission and Competition Tribunal, to reduce unfair and unequal competitions within a country.

Question 17

Purpose of economic policy

Answer 17

the overall performance of a country

Question 18

Active element in economic policy

Answer 18

Deliberate measures taken to maintain a certain level in the economy, e.g. The inflation rate.

Question 19

Passive element in economic policy

Answer 19

Decisions taken by authorities to keep away from doing something, e.g. Repo rate.