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A Level Economics > C38 Demand side policies > Flashcards

C38 Demand side policies Flashcards

1
Q

What are demand-side policies

A

Monetary policy
Fiscal policy
These have a major effect on the AD

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2
Q

What are monetary policies?

A

Policies that involve making decisions about interest rates and the money supply

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3
Q

What are contractionary monetary policies?

A

Reducing AD by using high interest rates and restriction the money supply

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4
Q

What are expansionary monetary policies?

A

Increasing AD by reducing interest rates and putting less restriction on the money supply

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5
Q

What is the problem with demand-side policies?

A

They cannot achieve all economic objectives at once
There will always be a trade-off

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6
Q

What is the main objective of monetary policies?

A

Price stability
Low inflation rates
Economic Gorwoth
Decrease unemployment

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7
Q

Who are interest rates set by in the UK?

A

By the MPC (monetary policy committee)

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8
Q

What does the MPC do?

A

Set inflation targets of 2%
Must be within + or - 1% of this target or they must get in contact with the bank of England

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9
Q

Why are low inflation rates desired?

A

Represents a stable economy and reduces the uncertainty for future investment

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10
Q

What traits of the Bank of England allow for stability and credibility?

A

Independent (politics doesn’t play a role)
Accountable (must reach the target or have to consult with the chancellor)

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11
Q

What does the MPC do to avoid conflicts with other objectives?

A

Monitoring economic data
size of output gaps
exchange rates average earning changes

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12
Q

What effect will an increase in interest rates have?

A

–borrowing
–spending
–investment
–onfidence
–exports
+ saving
+ imports

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13
Q

What is the liquidity trap?

A

When people are pessimistic about the future state of the economy, they may still chose to not invest even with low interest rates

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14
Q

How does the market affect interest rates?

A

Bank rates changes will cause changes to all interest rates as banks ofter have to borrow money

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15
Q

What are bank rates?

A

Lowest the Bank of England will lend at

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16
Q

How do interest rates affect exchange rates?

A

High-interest rates
–> High demand to buy
–> increase in the value of the £
–> more imports, fewer exports
–> bad equilibrium for BOP

17
Q

What is the time lag from BOE changes?

A

It takes years before the changes of the BOE to actually show effects

18
Q

What are fiscal policies?

A

Policies involving government spending and taxation

19
Q

What are expansionary fiscal policies?

A

Boost AD by increasing government spending and reducing taxation (causes budget deficit as GS> Revenue)

20
Q

What are contractionary fiscal policies?

A

Reducing AD by reducing government spending or increasing taxes (causes budget surpluses as GS< Revenue)

21
Q

What are automatic stabilisers?

A

Fiscal policy that automatically reacts to changes in the economic cycle

22
Q

What are discretionary policies?

A

Deliberate changes to spending and taxation level

23
Q

What is a structural budget position?

A

Long term fiscal stance during a part of the economic cycle

24
Q

What is a cyclical budget position?

A

Shorts term fiscal stance effected by the economic cycle

25
Q

What is current expenditure?

A

Repeated spending on things that are used quickly (wages)

26
Q

What is capital expenditure?

A

Spending on long term assets

27
Q

What is progressive taxation?

A

Individual’s taxes raise as income rises

28
Q

What is regressive taxation?

A

Individuals taxes fall as income rises

29
Q

What is proportional taxation?

A

Everyone pays the same % of tax of their income

30
Q

What tax system is used in the UK?

A

Progressive taxation e.g VAT and Income tax

31
Q

What affects government spending?

A

Population and its age
Government policies

32
Q

Why are budget deficits bad?

A

Government in debt
Discouraged investment
This leads to increased taxation

33
Q

Why are budget surpluses bad?

A

Suggests that taxes were too high

34
Q

What is the golden rule?

A

The government can borrow for investment and infrastructure but not for current expenditure

35
Q

What was it replaced by?

A

Office for budget responsibility, who help to manage government spending

36
Q

Why does increasing interest rates reduce inflation?

A

Incentivises saving and reduces incentive to consume

A Level Economics (36 decks)

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