Demand-Side Policies Flashcards
What is demand-side policy?
Policies aimed at influencing aggregate demand in the economy to achieve economic objectives like growth and employment
What is monetary policy?
The manipulation by the government through the central bank of monetary variables, such as interest rates and money supply, to achieve its objectives
What is fiscal policy?
Fiscal o=policy is the use of taxes, government spending, and government borrowing to achieve its objectives
What are the types of monetary policy?
Expansionary
Contractionary
What is expansionary monetary policy?
Expansionary monetary policy aims to increase aggregate demand and economic growth in the economy
This involves cutting interest rates or increasing the money supply to boost economic activity
How is expansionary monetary policy put in place?
This involves cutting interest rates or increasing the money supply to boost economic activity
What is contractionary monetary policy?
Tight monetary policy implies the central bank is seeking to reduce the demand for money and limit the pace of economic expansion
This usually involves increasing interest rates
How is contractionary monetary policy put in place?
This usually involves increasing interest rates
How do interest rate impact consumer durables?
Lower interest rates make loans cheaper, encouraging the purchases of consumer durables and hence increasing consumption expenditure
How do interest rate impact the housing market?
Lower interest rates lower the mortgage repayments making houses more affordable
How does houses becoming cheaper impact aggregate demand?
Increases investment
Increases consumption
Releases money
How do cheaper houses increase investment?
Increased demand for housing creates new houses. This is considered an investment. Increased investment leads to increased AD
How do cheaper houses increase consumption?
Moving houses stimulates the purchases of consumer durables increasing consumption
How do cheaper houses release money?
People trading down to a cheaper house release equity in their home so have greater wealth
People trading up may borrow for the purchase to buy consumer durables
How do interest rates impact the wealth effect?
Falls in interest rates increase asset prices. Owners of these assets have greater wealth and their assets have greater value. This encourages spending
How do interest rates affect savings?
Higher interest rates make saving more attractive as there is greater reward for delaying purchases
This causes a fall in AD
How do interest rates affect investment?
Lower rates of interest make investment projects more profitable as borrowing becomes cheaper. This boots economic activity and AD
How do interest rates impact exchange rates?
Lower interest rates weaken a currency as foreign investors seek better returns elsewhere
This increases net exports increasing aggregate demand
How does quantitative easing work?
The central bank buys financial assets in exchange for money in order to increase borrowing and lending in the economy
This is because interest rates are lower as banks have money and so give out loans cheaper
What effects does quantitative easing have on the economy?
Increases money supply
Reduces long-term interest rates
Encourages investment and spending
