Demand and Supply Side Policy

Question 1

Demand-side policies

Answer 1

any government policies designed to influence AD in the economy, thus affecting the APL and the real national output
ex: Printing more money

Question 2

Fiscal policy

Answer 2

a policy using changes in government spending and/or direct taxation to achieve economic objectives
ex: Tac cuts are example of expansionary fiscal policy because it increases people’s disposable income

Question 3

Monetary Policy

Answer 3

a policy using changes in the money supply or interest rates to achieve economic objectives
ex: higher interest rates are an example of contractionary monetary policy because it disincentives borrowing money to invest and consume

Question 4

Aggregate Supply

Answer 4

total amount of domestic goods and service supplied by business and the government including both consumer goods and capital goods.
ex: AS diagram

Question 5

Short Run AS

Answer 5

is AS that varies with the level of demand for goods and services and that is shifted by changes in the cost of factors of production
ex: AS diagram

Question 6

Long Run AS

Answer 6

is AS that is dependent upon the resources in the economy and that can only be increased by the quality or quantity of the factors of production
ex: neo-classical AS

Question 7

Supply Side Policies

Answer 7

are government policies designed to shift the LRAS curve to the right thus increasing potential output
ex: better education (increases available human capital)

Question 8

The Multiplier

Answer 8

the ratio of a change in the level of the national income to an initial change of the injection into the circular flow of income
ex:if consumers spend 0.8 and save 0.2 of every £1 of extra income, the multiplier will be:
1/1-0.8
= 1/0.2
= 5
Hence, the multiplier is 5, which means that every £1 of new income generates £5 of extra income.

Question 9

The Accelerator

Answer 9

the relationship between the level of induced investment and the rate of change of national income
ex: when the economy has been experiencing a recession, investment will decrease because people will be unsure if they will receive a return on those investments.

Question 10

Crowding Out

Answer 10

is a situation where the government spends more (government expenditure) than it recieves in revenue (mainly taxation) and needs to borrow money forcing up interest rates and “crowding out” private investment and consumption (leaving less space for it)
ex: Crowding out begins to take effect when the interest rate level reaches a point at which only the government can afford to borrow. Unable to compete for loans under such circumstances, individuals and smaller-scale companies are forced (crowded) out of the market.