demand side policy

Question 1

What are the two demand-side policies?

Answer 1

– Monetary policy
– fiscal policy

Question 2

How can Monetary Policy boost Aggregate Demand?

Answer 2

By cutting Interest Rates

Question 3

What is meant by tight fiscal policy?

Answer 3

• Decreasing AD
- Government will cut Government Spending (G) and/or increase taxes
- Higher taxes reduces consumer spending

Question 4

Evaluative points for expansionary fiscal policy.

Answer 4

worsen the BOP on current account if additional disposable income is spent on imports , and the government will need to increase borrowing.

can lead to a high price level which could hamper the inflation target

Question 5

What is the aim of Demand Side Policies

Answer 5

Increase Aggregate Demand

Question 6

What is meant by a Negative Wealth Affect?

Answer 6

Where lower asset prices mean that people feel less inclined to spend.

Question 7

Evaluative points for Monetary Policy. specfifcaklky interest rates

Answer 7

• Raises the cost of production and causes inflation
- Takes 18 months to 2 years for interest rates to have their full impact (further delays because many mortgage holders have fixed rate policies, which delays the impact of their spending for some years)
- Monetary Policy hits the whole economy big and small businesses.
- Rising Interest Rates usually worsens income distribution

Question 8

Evaluative points for fiscal policy.

Answer 8

– It depends on the size of the Multiplier
- Depends on the state of the economy (works best in deep recession, Liquidity trap,

Question 9

Which is more effective Monetary or Fiscal Policy?

Answer 9

• Monetary Policy is set by the Bank of England and therefore reduced political influence 
- Monetary Policy is quicker to implement.
- Monetary Policy is inefficient during a Liquidity trap

Question 10

What is meant by the term monetary transmissions mechanisms?

Answer 10

Changing the rate of interest set off a chain reaction is in the economy which means that aggregate demand will shift

Question 11

In Monetary Policy, how do Lower Interest Rates boost Aggregate Demand?

Answer 11

• Reduce the cost of borrowing
- Encouraging investment and consumer spending
- Reduces the incentive to save, making spending look more attractive instead
- Lower mortgage interest payments increasing disposable incomes for consumers

Question 12

Drawbacks of Using Quantitative Easing.

Answer 12

• Greater inflow of money to the banks has caused them to take greater risks
- Causes Inflation

Question 13

What are Government bonds?

Answer 13

where you loan money to a government in return for an agreed rate of interest.

Question 14

What will happen if Demand Side Policies are used in an economy which is already close to full capacity?

Answer 14

It will mainly cause inflation

Question 15

What is meant by the term monetary policy?

Answer 15

Using monetary instruments such as the interest rate and quantitive easing to influence the levels of spending and Aggregate Demand

Question 16

What factor causes Quantitative Easing to not achieve its full potential?

Answer 16

• Nature of Banks
• Boosting the value of a banks assets and their holding of liquid assets as a result of QE would expect banks to lend more
•But after the global financial crisis banks are concerned about their health and as a result are less willing to lend

Question 17

What is meant by the term fiscal policy?

Answer 17

Is the manipulation of taxes and government spending to influence the overall level of demand in economy

Question 18

What is meant by the term demand-side policies?

Answer 18

Is the deliberate manipulation by the government of aggregate demand in order to achieve macro economic objectives.

Question 19

When can Demand Side Policies be used?

Answer 19

during a recession 
- A period below trend growth

Question 20

How does Quantitative Easing Work?

Answer 20

• Central Bank creates new money electronically (by adding it to its balance sheet)
- This Money is used to buy financial assets (government bonds)
- More Demand leads to higher prices of assets (Rise in the price of bonds leads to a lower yield for GOVERNMENT bonds) 
- Can cause a fall in long term interest rates
- Lower Interest rates and more cash in the banking system stimulates AD through a rise in consumption and investment

Question 21

By conducting Quantitative Easing does the government print new money?

Answer 21

NO it produced it electronically

Question 22

What must there be in an economy in order for Demand Side Policies to work effectively?

Answer 22

Spare Capacity (or a negative output gap)

Question 23

What are the problems with using Quantitative Easing to boost Aggregate Demand?

Answer 23

• By Increasing the money supply will cause inflation
However, during 2009-12 when QE was used Inflation caused by QE was minimal
- Though QE alone failed to return the economy back to normal growth projection

Question 24

what takes longer fiscal or monetary

Answer 24

While there will always be a lag in its effects, fiscal policy seems to have a greater effect over long periods of time and monetary policy has proven to have some short-term success.

Question 25

cut in interest rate on households

Answer 25

decrease Margate repayments

increase dispose income

increase consumption

increase ad

Question 26

cut interest rates on saving

Answer 26

decrease in savings

lower oppturnity cost

mps decreases
consumption increases

Question 27

cut interest rates new loans

Answer 27

become cheaper

cost of borrowing decreases

so increase coinumsption + investment

increase ad

Question 28

Fiscal policy goals:

Answer 28

Keep inflation on target
Stimulate economic growth
Matin a stable economic cycle

Question 29

Austerity definition

Answer 29

increase in government tax than government spending

Question 30

when does austerity happen

Answer 30

Austerity when the economy is in a recovery

Question 31

Hpwo do you make a system a regressive tax?

Answer 31

You make a flat rate across all the brackets

Question 32

tax austerity

Answer 32

If percentage in tax is greater than the government spending then it is austerity

Question 33

Expansionary:

cut

Answer 33

Cutting taxes - direct taxes, income tax and corporation tax gives money back to society quickly

Question 34

Rating government spending -

Answer 34

Increasing the budget deficit - increase borrowing which can be spent on project - long term effect on capital

Question 35

long run

Answer 35

Long run is in the government planned spending:
Human capital 
Pshyical capital 
Train 
Plane 
Road 
Port Dover 
Education 
Training? - short run takes you a short while and you can earn money while doing it