Demand Side Policy Flashcards
Main types of demand side policies
Monetary policy:
Gov manipulates interest rate & money s in to in/decrease AD
Fiscal policy:
Change to gov spending & taxation to in/decrease AD
Monetary policy Instruments
●interest rates: cost of borrowing & the reward for saving
●quantitative easing: central bank buys financial assets in ex for money to increase borrowing & lending
Interest rates & AD curve
-wealth affect: increase IR … purchasing power of income decreases … ppl feel poor … decrease D for g/s
-saving: increase IR … increase MPS bc increase rewards … decrease D for g/s
-investment: decrease IR … I projects affordable … grow AD = ACCELERATOR EFFECT
-Ex rate: decrease IR … decrease domestic currency value = WPIDEC
Quantitative easing & AD curve
commercial banks hold bonds (given by firms&gov) & CB buys bonds so commercial banks have more money
Base rate: IR BofE (centeral bank) charges commercial banks when borrowing
… decrease IR so increase D
… commercial banks offer lower IR to borrowers bc BofE gives them money
Expansionary Monetary policy
Policy to increase AD by decreasing IR / Increasing quantitative
easing
contractionary monetary Policy
Policy to decrease AD by Increasing IR / decreasing quantitative
easing
fiscal Policy Taxation
• Taxation
- Rate of tax: tax paid as a proportion of income earned
- progressive tax: Increase income … increase avg RofT eg- progressive income tax
- proportional tax: Increase income … no chang in RofT eg- flat rate tax
- regressive tax: Increase in income … decrease in avg RofT eg-indirect tax = tax on g/s
- decrease coporation tax … increase retained profit … increase MPI … increase AD
Fiscal Policy gov spending
●increase gov spending … increase budget surplus … money spent on public sector eg- ed/health care
Expansionary finally policy
Taxation & gov spending to increase AD
Contractionary fiscal Policy
Taxation & gov spending to decrease AD
EVAL POINTS
- national debt increase bc increase borrowing
- time lags
- size of multiplier
