Chapter 33/34

Question 1

Define austerity.

Answer 1

Official action taken by a gov to reduce its spending or the amount by which people spend.

Question 2

Define supply side policies?

Answer 2

Gov measures designed to increase aggregate supply in the economy.

Question 3

Why are supply side policies used?

Answer 3

Improve flexibility in labor markets, restore the incentive to work by lowering taxes, promote competition by privatization, increase investment by improving the flow of capital

Question 4

Why do govs want to increase supply?

Answer 4

It means resources are being used more efficiently e.g. labor more efficient
It means there is increased output and economic growth
There is also less chance for demand-pull inflation

Question 5

What are the supply side policies?

Answer 5

Privatization
deregulation, education/training
policies too boost regions w unemployment infrastructure spending
lower business taxes
lower income taxes

Question 6

How does privatisation increase supply?

Answer 6

It means that there is more competition and no monopolies. This means there is competitive pressure on firms to be more efficient and produce more at better quality. Also more firms= more produced.

Question 7

How does deregulation increase supply?

Answer 7

Reducing paperwork, the need to extra licenses and trivial rules encourages more firms to join the market. So, competition is increased.

Question 8

How does education/training increase aggregate supply?

Answer 8

If the quality of human capital is improved, employees become more productive and efficiency rises so more output is produced.

Question 9

How do policies to boost regions with unemployment increase aggregate supply?

Answer 9

E.g. by increasing wages, more people will want to work and more employees= more produced. Also, by making it easier to hire/fire people.

Question 10

How does infrastructure spending increase aggregate supply?

Answer 10

By improving transport and communication systems, the private sector becomes more geographically mobile. This means employees can be moved to other offices/new facilities built.

Question 11

How do lower business taxes increase supply?

Answer 11

It means that businesses will get to keep more of their profits which they can re-invest into the firm for expansion and greater output.

Question 12

How do lower income taxes increase aggregate supply?

Answer 12

Higher taxes reduce the incentive to work, so if taxes are lowered it encourages workers to produce more, take less holidays and take overtime.

Question 13

What impact do policy measure have on macroeconomic activity?

Answer 13

A gov wants to keep the economy growing, stabilize inflation, prevent long term deficits, protect the environment and keep unemployment low by using fiscal/monetary and supply side policies.

Question 14

How are the different policies used to reduce inflation?

Answer 14

Monetary: High interest rates may be set to reduce demand. It means people/firms will borrow less, and there is less investment and less economic growth which may increase unemployment.
Fiscal: Increasing taxes and lower gov spending may result in unemployment.
Supply side: If supply is increased, it stops demand-pull inflation.

Question 15

Explain what is meant by the possible trade-off between fiscal/monetary policies and inflation.

Answer 15

If anti-inflationary monetary/fiscal policies are used it may mean unemployment but a gov has to bare with it if they want to reduce inflation. Or they can use supply side policies.

Question 16

Explain the relationship between economic growth and the environment.

Answer 16

A business producing more output means more emissions from power generations, chemical processes etc. As extra wealth is generated people begin to buy more vehicles and make more online orders. More land is used by businesses, there’s less for wildlife.

Question 17

What is the possible trade-off between economic growth and the environment?

Answer 17

Many countries may decide environmental damage is worth economic growth, since the country’s living standards and median income rise, and there is less poverty.

Question 18

Explain the relationship between inflation and the current account balance.

Answer 18

When inflation is high, govs will want to reduce it because it means the price of exports is expensive and imports are cheaper, which worsens the current balance.

Question 19

Explain the possible trade-off between inflation and the current balance.

Answer 19

The fiscal policy can protect the current account balance because gov spending falls so demand falls whilst not actually affecting the exchange rate.