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Economics > Economic Policies > Flashcards

Economic Policies Flashcards

0
Q

What is monetary policy?

A

Monetary policy is the control of interest rates and money supply by the central bank to control aggregate demand

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1
Q

What is fiscal policy?

A

Fiscal policy is the control of government spending and taxation to control aggregate demand

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2
Q

What are supply side policies?

A

Supply side policies are government policies designed to increase aggregate supply, by increasing productive efficiency and output of an economy

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3
Q

How can an expansionary fiscal policy be used to promote growth and employment

A

This when the government cuts taxes and increases government spending. An increase in government spending means output, growth and employment increases

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4
Q

How can a tight fiscal policy be used to reduce the government deficit

A

Taxes are increased, Government spending is decreased In order to lower inflation, reduce output and increase unemployment

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5
Q

What’re the strengths of a fiscal policy

A

It can increase growth and employment if government spending increases

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6
Q

What are the weaknesses of a fiscal policy

A

By raising direct rich taxes ( income tax) it encourages tax avoidance amongst rich people

By raising taxes on the plot you create an unemployment trap where people are better of not working

Changes in taxes take a long time to work and by the time that they do they may not have the desired affect due to the state or the economy

If government increase borrowing it can cause interest rates to rises. They could also ruin their credit rating.

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7
Q

How does a tight fiscal policy affect AD and AS

A

When the economy is doing well (curve on Kensian supply curve) it means that there may be demand inflation. If government increase tax, disposable income, consumption and investment falls, so AD moves to the left.

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8
Q

How does an expansionary fiscal policy affect AD and AS

A

If the government wants to increase output, growth and employment it will cut taxes so there’s more disposable income. This will increases investment and consumption. So it moves the AD curve to the right

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9
Q

What does an expansionary fiscal policy aim to increase?

A

Government spending increase: G

Taxation reduction: C +I

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10
Q

What does a tight fiscal policy achieve?

A

Gove’ spending reduction: Less G

Tax increase: Less C + I

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11
Q

What are the pros of fiscal policy?

A

Government spending can be directed at areas in need

Increase in GDP will reduce government debt

Tax can encourage positive externalities

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12
Q

What are the cons of fiscal policy?

A

Tax rebates may be spent on imports, causing revenue to leak

Increase of GDP may not be sustainable

Time lags for policy to take effect

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13
Q

How fiscal affects aggregate supply

A

Change in income tax can alter labour force

Lower tax increases productivity

Lower corporation tax increases investment

Spending on infrastructure will support new businesses

Spending on education will in crease human capital

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14
Q

Types of taxtion

A 
Direct:
Income
NI
corporation
Inheritance
Capital gains

Indirect:
VAT
Excise duty

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15
Q

What can fiscal policy fix

A

A budget deficit where the government spends more than tax revenue

A budget surplus is where government spends less than tax revenue

16
Q

What is an expansionary monetary policy?

A

What the government lowers interest rates to increase consumption and investment

More yd

Loans and debts reduced

Less attractive to save

It increases output, growth and inflation

17
Q

What are the problems of an expansionary monetary policy?

A

Banks don’t have the money to lend

Banks do not reflect lower interest rates

Customers do not borrow due to job insecurity and falling house prices

18
Q

What is a tight monetary policy

A

When banks raise interest rates to encourage saving

People have less yd after higher mortgage interest

Saving more attractive

Large ticket items more expensive on credit

It will reduce consumption and investment : lower inflation
Lower output

Higher unemployment

19
Q

What are the problems of expansionary monetary policy?

A

Need a large change to see effect

Causes hardship against mortgage repayers

Reduction in capital causes long term growth issues

20
Q

How can quantitative easing increase the money supply?

A

Central bank buys bonds of commercial banks to increase the money in circulation

Increasing;
Growth
Employment
Inflation

21
Q

What are the problems of quantitative easing?

A

Commercial banks wont lend as they pay off debts

Firms may not invest if the economy is not stable

22
Q

How to reduce the money supply

A

Issue government bonds at high interest so customers buy these instead of commercial lending

23
Q

What two things do supply side policies aim to do

A

Lower costs of production

Increase productive capacity

24
Q

For supply side policies to be most effective, what do they need?

A

A proportional increase in demand

25
Q

What two effects do supply side policies have on the economy?

A

Cause a fall in the price level, so less inflation

Cause an increase in the output

26
Q

Name seven main supply side policies

A 
Education and training
Government assistance to new firm
Reduction in direct taxation
Reduction in unemployment benefit
Privatisation
Deregulation
Reduction in trade union power
27
Q

What does education and training do

A

Increases occupational mobility of labour, output per worker per hour and human capital in the long run

28
Q

How does the government assist new firms?

A

Charge low corporation tax
Provide grants

This allows them to establish themselves in the market so more production

29
Q

How do reduction in direct taxes increase AS

A

Cut corporation tax will increase investment

Cut in income tax will make the unemployed find jobs and the employed to work overtime and accept promotion

30
Q

How does a reduction in unemployment benefit increase AS

A

Causes a large gap between income and benefit

So people are forced to find jobs

31
Q

How does privatisation increase AS

A

Market controls the supply and demand for goods and services

Competition increases efficiency

32
Q

How does deregulation increase AS

A

Remove laws and legislation that prevents competition between firms

More efficient business

33
Q

How will reduction in trade union power increase AS

A

Prevent trade unions form pushing up wage rates or reducing working hours

More output per worker per hour

34
Q

Evaluative points on supply side policies

A

Higher competition will increase current account position

Can be costly
Don’t work without AD
Take along time to take effect

Economics (5 decks)

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