6.5 - Monetary Policy Flashcards
Define microeconomic policy instruments
Tools an economy uses to achieve its macro objectives
Define fiscal policy
Decisions made by the government on its expenditure, taxation, and borrowing levels in order to influence AD.
Whats fiscal policy?
Government spending and taxation.
Government can spend more than it receives from taxes - budget/fiscal deficit, known as PSNCR - Public Sector Net Cash Requirement
Expansionary fiscal policy and contractionary fiscal policy
Aim of expansionary fiscal policy
To encourage consumer spending and increased AD in the economy, therefore create economic growth and reduce unemployment
What is contractionary fiscal policy?
Discourage consumer spending and reduce aggregate demand in the economy, in order to reduce inflation
Types of fiscal policy
Discretionary fiscal policy - counter cyclically
Automatic stabilisers - recession, less taxes
Define monetary policy
Decisions made by the central bank regarding monetary variables such as the size of the money supply and the bank rate of interest in order to influence AD.
Define monetary policy committee
Committee of the Bank of England with the responsibility for meeting the government’s inflation rate
Expansionary monetary policy
- Decrease interest rate to increase AD, help economy grow
Define and Explain quantitative easing
Definition: process by the central bank purchases assets such as government bonds in order to release additional money to the financial system
Central bank (BoE) creates money electronically
The money is is used for government bonds from financial institutions eg banks, pension companies
Institutions invest in new business, business lending
Stimulates economy to grow, increase money supply allows more credit available
Creates higher demand for government bonds
Contractionary monetary policy
Increase interest rate
Decrease money supply
List types of supply side policy
Market based supply side policies
Interventionist policies
