5. Government macroeconomic intervention Flashcards
What is a fiscal policy?
Policy that involves changing government spending and taxation to influence aggregate demand
What is an expansionary fiscal policy?
A policy that aims to change government spending and, (or), taxation in order to increase AD
What is a contractionary fiscal policy?
A policy that aims to change government spending and, (or), taxation in order to decrease AD
Knowledge, (AO1)
Why would the government use expansionary fiscal policies?
o Expansionary fiscal policies mean policies that will increase AD
o Boost growth
o Reduce unemployment
o Increase inflation
Knowledge, (AO1)
Why would the government use contractionary fiscal policies?
o Contractionary fiscal policies mean policies that will decrease AD
o Reduce demand-pull inflation
o Reduce budget deficit
o Reduce current account deficit
How could a contractionary fiscal policy reduce a current account deficit?
o If the government increase taxation, this will lead to people having less real disposable income
o Consumption will decrease, leading to an inward shift in AD
o Because consumers have less disposable income, they have a smaller marginal propensity to consume and therefore also have a smaller marginal propensity to import
What are some examples of expansionary fiscal policies?
o Reduction in income tax
o Reduction in corporation tax
o Increase in government spending
What is meant by the term monetary policy?
Changes in the interest rates, the money supply and the exchange rate by the centeral bank in order to influence AD
What is an expansionary monetary policy?
Changes in the interest rates, money supply or the exchange rate, that aim to increase aggregate demand
What is a contractionary monetary policy?
Changes in the interest rates, money supply or the exchange rate, that aim to decrease aggregate demand
What is the main reason for using expansionary monetary policies?
- Increase iunflation
- Increase growth
- Reduce unemployment
What is the main reason for using contractionary monetary policies?
- Reduce inflation
What are some examples of expansionary monetary policies?
- Reducing interest rates, which incentivises spending from consumers and investment for firms
- In a fixed exchange rate system, the centeral bank could weaken the exchange rate, (WPIDEC), which means imports will be dere and exports will be cheap meaning X should assuming the goods are price elastic, be greater than M leading to an outward shift in AD
