demand side policies

Question 1

what is monetary policies

Answer 1

• used by the government to control money flow in the economy eg: interest rates

Question 2

what are fiscal policies?

Answer 2

• uses government spending and revenues from tax to influence AD

Question 3

Monetary policy instruments

Answer 3

1. Interest rates - which is just the cost of borrowing money or the return received for saving
2. Quantitative easing - used by banks to help stimulate the economy when monetary polars no longer effective, this increases money supply resulting in inflation

Question 4

How does the use of interest of rates reduce AD?

Answer 4

• if the rate if inflation is above average level, then the MPC ( monetary policy committee ) raise base interest rate, reducing AD
• this means that C, I and ( X - M ) fall, and AD curve shifts to the left

Question 5

How does the use of interest rates increase AD?

Answer 5

• A reduction in the base rate will lead to a rise in AD
• this mean that, consumption and investment increase due lower costs if borrowing, increase in real output
• saving becomes less attractive, as a there’s a lower rate of return offered

Question 6

What is Quantitative Easing? And what’s the use for it?

Answer 6

• QE is usually used where inflation is low, and it’s not possible to lower interest rates further
• QE is a method to pump money directly into the economy by which central banks purchase long-term assets or capital markets
• this supposedly is to encourage more investment, more spending and higher growth

Question 7

What are the limitations of monetary policy?

Answer 7

• banks might not pass the base rate onto consumers, which means that it might not have the intended effect
• even if the costs of borrowing is, consumers might be unable to borrow because banks are unwilling to lend eg: 2008 crash, banks became more risk averse

Question 8

Fiscal policy instruments

Answer 8

• Government expenditure: to spending on areas such as health, education, defence , infrastructure and welfare benefits
• 2 forms on tax: 1. Indirect taxes eg; VAT and Direct Taxes eg: Income tax and corporation tax

Question 9

What is Expansionary fiscal policy?

Answer 9

• this aims to increase AD - if the government increase spending or reduce taxes to do this
• it leads to a worsening of the government budget defict, and it may mean governments have to borrow more to finance this

Question 10

What is deflationary fiscal policy?

Answer 10

• aims to decrease AD ( contracting )
• governments cut spending or raise taxes, which reduces consumer spending
• leads to an improvement of the government budget defict

Question 11

What are the limitations of fiscal policies?

Answer 11

• governments might have imperfect information about the economy, lead to inefficient spending
• if interest rates are high, fiscal policy might not be effective for increasing demand
• the bigger the size of the multiplier, the bigger the effect on AD and the more effective the policy