Economic Policies Flashcards
What is monetary policy?
Monetary policy is the control of interest rates and money supply by the central bank to control aggregate demand
What is fiscal policy?
Fiscal policy is the control of government spending and taxation to control aggregate demand
What are supply side policies?
Supply side policies are government policies designed to increase aggregate supply, by increasing productive efficiency and output of an economy
How can an expansionary fiscal policy be used to promote growth and employment
This when the government cuts taxes and increases government spending. An increase in government spending means output, growth and employment increases
How can a tight fiscal policy be used to reduce the government deficit
Taxes are increased, Government spending is decreased In order to lower inflation, reduce output and increase unemployment
What’re the strengths of a fiscal policy
It can increase growth and employment if government spending increases
What are the weaknesses of a fiscal policy
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.
How does a tight fiscal policy affect AD and AS
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.
How does an expansionary fiscal policy affect AD and AS
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
What does an expansionary fiscal policy aim to increase?
Government spending increase: G
Taxation reduction: C +I
What does a tight fiscal policy achieve?
Gove’ spending reduction: Less G
Tax increase: Less C + I
What are the pros of fiscal policy?
Government spending can be directed at areas in need
Increase in GDP will reduce government debt
Tax can encourage positive externalities
What are the cons of fiscal policy?
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
How fiscal affects aggregate supply
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
Types of taxtion
Direct: Income NI corporation Inheritance Capital gains
Indirect:
VAT
Excise duty
What can fiscal policy fix
A budget deficit where the government spends more than tax revenue
A budget surplus is where government spends less than tax revenue
What is an expansionary monetary policy?
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
What are the problems of an expansionary monetary policy?
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
What is a tight monetary policy
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
What are the problems of expansionary monetary policy?
Need a large change to see effect
Causes hardship against mortgage repayers
Reduction in capital causes long term growth issues
How can quantitative easing increase the money supply?
Central bank buys bonds of commercial banks to increase the money in circulation
Increasing;
Growth
Employment
Inflation
What are the problems of quantitative easing?
Commercial banks wont lend as they pay off debts
Firms may not invest if the economy is not stable
How to reduce the money supply
Issue government bonds at high interest so customers buy these instead of commercial lending
What two things do supply side policies aim to do
Lower costs of production
Increase productive capacity
For supply side policies to be most effective, what do they need?
A proportional increase in demand
What two effects do supply side policies have on the economy?
Cause a fall in the price level, so less inflation
Cause an increase in the output
Name seven main supply side policies
Education and training Government assistance to new firm Reduction in direct taxation Reduction in unemployment benefit Privatisation Deregulation Reduction in trade union power
What does education and training do
Increases occupational mobility of labour, output per worker per hour and human capital in the long run
How does the government assist new firms?
Charge low corporation tax
Provide grants
This allows them to establish themselves in the market so more production
How do reduction in direct taxes increase AS
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
How does a reduction in unemployment benefit increase AS
Causes a large gap between income and benefit
So people are forced to find jobs
How does privatisation increase AS
Market controls the supply and demand for goods and services
Competition increases efficiency
How does deregulation increase AS
Remove laws and legislation that prevents competition between firms
More efficient business
How will reduction in trade union power increase AS
Prevent trade unions form pushing up wage rates or reducing working hours
More output per worker per hour
Evaluative points on supply side policies
Higher competition will increase current account position
Can be costly
Don’t work without AD
Take along time to take effect
