Demand Management - Demand Side Policies

Question 1

Fiscal policy

Answer 1

Government’s policy for revenue (from taxes mostly) and expenditure

Question 2

Expansionary fiscal policy

Answer 2

Decreases taxes/increases govt expenditure (AD, PL, GDP, emp up)

Question 3

Contractionary fiscal policy

Answer 3

Increases taxes, decrease govt expenditure (AD, PL, GDP, Empl down)

Question 4

Fiscal policy goals

Answer 4

Low inflation, unemployment rates, long term econ growth, reduce business cycle fluctuations, promote fair distribution of income, achieve a balance

Question 5

Problems with fiscal policy (5)

Answer 5

Time lags, political pressure, sustainable debt, long term impact, crowding out

Question 6

What is the impact of high govt debt levels?

Answer 6

Debt servicing costs, crowding out, long term tax rate increase, dealing with emergencies (lack of options)

Question 7

MPC

Answer 7

Marginal prosperity to consume (domestic)

Question 8

MPL

Answer 8

Marginal prosperity to leak (Not domestic consumption ie saving, taxes, imports)

Question 9

Kenysian multiplier

Answer 9

Amount that national income increases as a result of the initial injection

Question 10

Monetary policy

Answer 10

Policies around the supply of money and the interest rate levels in an economy

Question 11

Monetary policy goals

Answer 11

Keep inflation low and stable, low unemployment, long term growth, less business cycle fluctuations, improve balance

Question 12

Expansionary monetary policy

Answer 12

Increase AD by lowering interest

Question 13

Strengths of monetary policy

Answer 13

Implementation time (quick), independence from govt (no political influence), no crowding out (no borrowing money)

Question 14

Weaknesses of monetary policy

Answer 14

Time lags, not effective when interest rates are already very low, consumer and business confidence is also a factor of spending

Question 15

Reserve requirement

Answer 15

Percentage of deposit that banks have to keep on hand

Question 16

Money multiplier formula

Answer 16

1 / reserve requirement (as a decimal_

Question 17

How can money supply be controlled?

Answer 17

Reserve requirements and open market operations (short term buying/selling securities), changing base rate/official cash rate (this is interest rate), quantitative easing (creating more money)

Question 18

Interest

Answer 18

Price of money

Question 19

Nominal interest rate

Answer 19

Rate of interest available excluding any adjustment for inflation

Question 20

Real interest rate

Answer 20

Rate of interest adjusted for inflation

Question 21

Real interest rate formula

Answer 21

Nominal interest rate - interest rate