Economic policy

Question 1

Which of the following shows the main impact of a decrease in income tax?

Answer 1

The main impact of a decrease in income tax would be to increase aggregate demand. Decreasing income tax would increase disposable incomes, increasing consumption and therefore increasing aggregate demand. Decreasing income tax could impact aggregate supply by increasing the incentive to work, but this is not the main impact.

Question 2

What shows the likely impact of a reduction in income tax on AS?

Answer 2

A reduction in income tax is likely to increase labour supply (the number of people willing to work). People can keep more of their income, so they are likely to want to work more. An increase in labour supply will then lower wages, as shown below.

Question 3

Supply-side Policies

Answer 3

Government policies which aim to increase aggregate supply.

Question 4

Demand-side Policies

Answer 4

Government policies which aim to increase aggregate demand.

Question 5

What is demand side policies split into

Answer 5

• Fiscal policy - UK gov’t

- Monetary policy - Bank of England