demand side policies - macro Flashcards
Monetary policy involves
interest rates and quantitative easing
Fiscal and monetary policy
Fiscal policy involves
government spending and taxation
Who has the responsibility of interest rates and money supply
Bank of England
How often do they meet to adjust base rates?
Monthly
Which economic indicators might be consulted before deciding on a change in base rate?
GDP, unemployment, exchange rates, house prices, the level of investment by firms and GDP growth in other countries
Interest rate meaning
Interest rates are the cost of borrowing and the reward for saving
What does quantitative easing achieve to do
boost the funds available for lending to businesses and firms
What is monetary policy affected by
Size of change in intrest rates
Size of multiplier
What is the meaning of fiscal policy
The manipulation of government spending, taxation and government borrowing to influence the level of economic activity.
What is direct tax
Direct tax is imposed on the income of individuals or profits of businesses
Paid directly to government
Direct tax example
Income tax
Corporation tax
Inheritance tax
Indirect tax
Indirect tax is imposed on goods or services
Increase the price of that good or service
Indirect tax example
Value Added Tax
Excise duty
Customs duty
What does fiscal policy depend on
Size of change in government spending
Size of multiplier effects the size of the change in AD
Takes time to see effects
Base rate meaning
the rate that the Bank charge commercial banks and discount houses.
Used to influence other interest rates
Supply-side policy meaning
Policies that seek to improve the long-run productive potential of the economy
What will a successful supply-side policy do
Shift country’s production possibility frontier to the left
What do market-based supply-side policy do
allow the free market to operate with the government reducing its role in the market
What do interventionist supply-side policy do
involve government intervention to tackle market failure
Supply side - how does cutting income tax increase incentives
This should create incentives to work and expand the labour force
This may influence the inactive individuals to enter the labour force and boost output
Supply-side - how does cutting corporation tax increase incentives
increases profit motive of firms which can be re-invested in capital
Supply-side How does modification of welfare payments increase incentives
Widen gap between benefits and wages to boost work incentives
Supply-side How does investment grants increase incentives
Offers incentives to invest in capital
Supply-side How does regional policy increase incentives
Public investment
Provides incentives for firms to set up in depressed regions
Supply-side How does deregulation increase competition
Opening markets to freer competition and removing barriers to entry should help to drive productivity gains and boost supply
Supply-side How does privatisation increase competition
Minimisation of state control which can often be inefficient
This has been pursued by a number of (mainly Conservative) governments to privatise key areas of the economy in order to drive efficiency
