Demand Side Policies Flashcards
What is monetary policy?
Monetary policy is the manipulation of interest rates and the money supply to achieve macroeconomic objectives.
What is fiscal policy?
Fiscal policy is the use of taxation, government spending and government borrowing to achieve macroeconomic objectives.
What are instruments of policy?
Instruments of policy are the variables that the government is attempting to control such as interest rates, taxation and government spending. `
How does changing interest rates affect the economy?
Consumer durables (credit card), Housing market (mortgage), Wealth effects, Saving, Investment, Exchange rate
What is quantitative easing and how can it stimulate AD?
Quantitative easing is a monetary policy instrument where the central bank buys financial assets such as bonds from commercial banks in exchange for money. This money can then be lent to consumers or businesses. Quantitative easing also lowers interest rates thereby making borrowing cheaper. !! By lowering interest rates, quantitative easing has an effect on the exchange rate. It causes the currency to depreciate which means that exports rise and imports fall.
What are some criticisms of demand side policies?
Time lags (MP 18-24 months), Conflicting objectives (net exports and inflation), National debt, Zero lower bound (liquidity trap), Quantitative easing effectiveness, Multiplier size, Classical vs Keynesian
What are the effects of expansionary fiscal policy?
Increased growth, Decreased unemployment, Increased inflation, Income redistribution
What are the effects of contractionary fiscal policy?
Decreased inflation, Decreased balance deficit, Income redistribution, Decreased current account deficit
How can fiscal policy affect LRAS?
Reduction in income taxes could incentivise the inactive population to find a job. This increases the amount of labour in the economy. Reduction in corporation taxes could incentivise businesses to reinvest retained profits and increase the capital stock of the economy. Increases in government spending could increase LRAS if new infrastructure is built which would increase the capital stock of the economy.
What are automatic stabilisers?
Automatice stabilisers are fiscal policy tools that have a countercyclical impact on th economy. They work through a progressive tax system and through welfare benefits.
What are the effects of expansionary monetary policy?
Increase inflation, Increase growth, reduce unemploy
ment
What are the effects of contractionary monetary policy?
Reduce inflation, Prevent excessive credit, Reduce excess debt, Reduce current account deficit
How can monetary policy affect LRAS?
Reduction in interest rates make borrowing cheaper which makes investment more attractive. This increases the capital stock of the economy which increases the LRAS.
What factors affect the effectiveness of monetary policy?
Size of the output gap, Consumer and business confidence, Availability of credit, Size of the IR cut
How do automatic stabilisers have a countercyclical effect?
During booms, incomes rise, therefore the average tax rate increases. This means that houshold disposable income decreases thereby reducing consumption. Furthermore, during booms, unemployment decreases, therefore government spending on welfare benefits decreases which further decreases aggregate demand.
