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IB Economics SL > Demand-Side Policies > Flashcards

Demand-Side Policies Flashcards

1
Q

Define demand-side policies

A

Macroeconomic policies aimed at influencing the level of aggregate demand in order to affect growth, employment and inflation.

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2
Q

What are the two demand- side policies?

A

Monetary policy

Fiscal policy

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3
Q

Define monetary policy

A

Conducted by the central bank of the country and involves changes in the money supply or interest rates

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4
Q

What are the aims of monetary policy?

A
  1. Achieve and maintain price—> stable rate of inflation
  2. To pursue max employment
  3. Minimise fluctuations in the business cycle
  4. Influences exchange rate of a currency
  5. Promote a stable economic environment for long-term growth
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5
Q

What will the central bank do to increase aggregate demand?

A

EXPASNIONARY MONETARY POLICY- low interest rates

  1. Low interest rates encourage consumer consumption
  2. Low interest rates encourage firms to borrow
  3. Increased supply of currency will decrease its value, exports will increase
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6
Q

Draw the graph of expansionary monetary policy

A

see notes:)

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7
Q

What will the central bank do if they want to decrease AD?

A

CONTRACTIONARY MONETARY POLICY- increase in interest rates

  1. High interest rates discourage consumer borrowing and spending on credit
  2. High interest rates discourage investments
  3. Increase in value of a currency and therefore exports decrease
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8
Q

Illustrate the graph of contractionary monetary policy

A

See notes

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9
Q

Define real interest rate

A

Difference between bank interest rate and the rate of inflation

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10
Q

What are advantages of monetary policy?

A
  1. Flexible- respond quickly to changing economic conditions
  2. Incremental -credit conditions can be tightened/loosened gradually
  3. Independent from the government
  4. Faces shorter time lags–> no parliamentary debates
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11
Q

What are disadvantages of monetary policy?

A
  1. There is a limited scope of reducing interest rates to help an economy when they are close to zero
  2. Less effective in fighting a recession- if there is low business and consumer confidence then there is no impact of low interest rates
  3. Time lags in terms of adjustment of consumer habits and behaviours to alter AD
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12
Q

Define fiscal policy

A

A demand- management policy whereby the govt changes the level of government expenditures and or direct taxes in order to affect AD and thus real output, employment and APL

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13
Q

What do government expenditures include?

A
  1. Capital expenditures
  2. Current expenditures
  3. Transfer payments
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14
Q

Define budget deficit

A

When government expenditures exceed government revenues

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15
Q

Define budget surplus

A

Government revenues exceed government expenditures

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16
Q

What are aims of fiscal policy?

A
  1. Help an economy restore full employment
  2. Decrease cyclical unemployment
  3. Decrease inflation
  4. Reduce short-term fluctuations in the business cycle
  5. Narrow income inequality
  6. Decrease trade imbalances
  7. Faster long-term growth
17
Q

Describe and illustrate how expansionary fiscal policy works

A

Shifts AD to the right see notes for graph
increases govt expenditures
taxes decrease, disposable income increases and consumption increases
decrease in corporate taxes and leads to increase in investment

MAY LEAD TO INFLATION

18
Q

Describe and illustrate how contractionary fiscal policy works

A

Shifts AD to the left see notes for graph
increases decreases
taxes increase, disposable income decreases and consumption decreases
increase in corporate taxes and leads to decrease in investment

19
Q

What are advantages of fiscal policy

A
  1. Affects AD directly
  2. Can be targets- targets specific sectors of economy
  3. Certain expenditures may increase potential output
  4. Fiscal policy can be scaled up
20
Q

What are disadvantages of fiscal policy?

A
  1. Politicians are responsible for fiscal policy
  2. May be characterized by time lags- parliamentary debates
  3. May lead to inflation
  4. Unsustainable debt may occur
  5. Widen a trade deficit
  6. Tax cuts may induce more spending

IB Economics SL (17 decks)

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