Demand-side Policies Flashcards
What is Monetary Policy?
- The central bank or regulatory authorities control the level of AD by altering base interest rates or amount of money in the economy
What is Fiscal Policy?
- Changes to government spending and taxation to influence AD
What is a budget deficit?
Government spending > Government earning from tax revenue
What is a budget surplus?
Government spending < Government earning from tax revenue
What is Expansionary Fiscal Policy?
An attempt to boost AD
- Boost Growth
- Reduce unemployment by increasing AD (cyclical unemployment)
- Increase demand-pull inflation
- Redistribute income (Gov welfare and reduction in tax)
What are some examples of Expansionary Fiscal Policy?
- Reduction in Income tax
- Reduction in Corporation Tax
- Increase in Govt Spending
NOTE GRAPH
What are the side affects of Fiscal Policy on LRAS?
- Reduction in income tax, higher MPC of poor, more incentive to enter labour force and therefore increase supply
- Reduction of Corporation Tax means investment into quality + quantity of capital
- Increase of Govt spending can increase health, infrastructure and welfare
What are the cons of Fiscal Policy?
- Demand-pull inflation
- Current account deficit
- Worse Gov finances, may have to cut gov spending and boost taxes in future
- Time Lag as boost in AD may take time, e.g new building and tax cts
- Size of output gap determines effectiveness
- Size of multiplier determines effectiveness of Fiscal Policy
What is Contractionary Fiscal Policy?
- Reduce inflation (demand pull)
- Reduce Budget Deficit
- Redistribute income (tax the rich)
- Reduce current account deficit (less income due to tax, less imports due to lower demand)
What is Expansionary Monetary Policy?
- Increase Inflation
- Increase Growth
- Reduce Unemployment
Expansionary use of Interest Rates?
- Low Credit Card interest rate = lower borrowing costs for consumers
- Low saving rates, ROI of saving lower
- Lower Mortgage Rates means more consumption
- Low rate on business loans increases Investment
- Weaker Exchange Rate (WPIDEC)
- Wealth Effect
What are Cons of using the interest rate to change AD?
- Can cause a trade deficit
- Time lag, 2 years to take full effect
- If Interest Rates are too low they cannot be decreased any further
What is Contractionary Monetary Policy?
- Reduce Inflation
- Prevent asset/credit bubbles
- Reduce excess debt and promote saving
- Reduce current account deficit
What is Quantitative Easing?
When Bank of England buys assets in exchange for money to increase money supply and move money around the economy during times of low demand
What does Quantitative Easing entail?
- Reducing pressure on banks and prevents liquidity trap
- One way is increasing size of reserves which encourage bank to lend money
- Increases consumption and investment and increase in AD
