Demand side policies

Question 1

What is demand management?

Answer 1

The use of fiscal and monetary policy to influence the level of aggregate demand

Question 2

what is fiscal policy?

Answer 2

The use of government spending and taxation to influence the economy.

Question 3

what is monetary policy?

Answer 3

The use of interest rates or QE to influence the economy

Question 4

What is expansionary demand management?

Answer 4

This attempts to increase AD in order to increase economic growth and reduce cyclical unemployment

Question 5

What is contractionary demand management?

Answer 5

This attempts to reduce AD in order to reduce inflation

Question 6

What are some ways fiscal policy can be used to influence AD?

Answer 6

Any increase in government spending on infrastructure, health care, education etc will boost AD -> multiplier effect leading to an even larger rise in aggregate demand and national income (real GDP)

• A cut in income tax -> increase in disposable income -> increase consumer spending -> increase AD
• A cut in corporation tax rates-> increase profits after tax -> more investment -> increase in AD

Question 7

What is the difference between a rise in income tax and a rise in VAT and diagrams?

Answer 7

A rise in direct tax such as income tax would reduce AD shifting the AD curve to the left.

a rise in an indirect tax such as VAT would affect business costs This means a rise in VAT decreases SRAS

Question 8

What are ways that lower interest rates can boost consume spending?

Answer 8

Lower interest rates -> lower incentive to save -> increase AD -> Increase in economic growth

Lower interest rates -> lower cost of borrowing -> more households can be taking on loans to buy goods

Lower interest rates -> lower mortgage costs -> more disposable income leading to more spending -> AD

Question 9

What are ways that lower interest rates affect investment?

Answer 9

Lower interest rates -> Lower cost of borrowing / loan payments -> increased investment by firms

Less incentive to save retained profits so they can be invested

Question 10

How can lower interest rates affect imports and exports?

Answer 10

Lower interest rates can lead to a depreciation of the pound -> imports decrease and exports increase leading to increase in AD

Question 11

Disadvantages of demand management?

Answer 11

1. time lags
2. unintended consequences
3. incomplete information
4. can be ineffective without other policies like supply side policies

Question 12

Is demand management on its own enough?

Answer 12

No, supply side policies should be used with demand side policies to be effective

Question 13

What is quantitative easing?

Answer 13

When the Bank of England increases the money supply and uses this to buy bonds (mainly government debt) from the banking sector.

Question 14

What impact does QE have on AD?

Answer 14

increases value of wealth -> increased consumer confidence -> increased consumer spending. This combined with any investment -> Increased AD -> more economic growth and a fall in cyclical unemployment

Question 15

What are 3 limitations of QE?

Answer 15

• May increase inequality
• QE may be ineffective at boosting AD
• Could lead to inflation

Question 16

What is a budget deficit?

Answer 16

when government spending is greater than tax revenue

Question 17

Why should we be concerned about the national debt?

Answer 17

-High government debt can impose a burden on future generations