Fiscal and Monetary Policy Flashcards
What is monetary policy? 3 points
Adjusting interest rates (to control inflation) (1) and the money supply to manage fluctuations in economic activity (2). Monetary policy is the responsibility of the Bank of England in the UK. (3)
What is fiscal policy? 2 points
Governments attempt to manage fluctuations in the economic activity through taxation (1) and expenditure (2).
Give some examples of monetary policies. (3)
- Increase or decrease the base rate of interest.
- Issuing more notes and coins.
- Control money in the economy by buying and selling bonds (quantitive easing or quantitive tightening)
What is the purpose of increasing or decreasing the base rate of interest?
Interest rates are raised to reduce the rate of inflation (1). Higher interest rates means borrowing costs more and savings get a higher return (2). This leads to less spending in the economy to bring the rate of inflation down (3).
Interest rates are lowered to encourage spending which causes inflation to rise (4). Lower interest rates means borrowing costs less and savings get a lower return (5).
How and why does the BoE control the amount of money in the economy? 4 points
The BoE controls the amount of money in the economy by buying and selling bonds (1). They buy bonds to push up their prices and bring down long term interest rates (2). In turn, spending increases which puts upward pressure on prices, raising inflation (3).
The BoE reverses quantitive easing (quantitive tightening) buy selling bonds, decreasing the overall amount of money in the economy and slowing sales which reduces inflation (4).
Who makes decisions about raising or lowering the base rate in the UK? 2 points
The Monetary Policy Committee who meet monthly.
Who is the central bank for the UK?
The Bank of England.
Who is the central bank for America?
The Federal Reserve.
Who is the central bank for the Eurozone countries?
European Central Bank.
Give some examples of fiscal policy. 5 points
- Increase the personal tax allowance.
- Increase the VAT rate.
- Re-introduce the 50p rate of tax.
- Increase spending on the NHS.
5.Decrease spending on education.
Why increase the personal tax allowance? 2 points
Increasing the personal tax allowance focusses tax cuts on people with lower incomes and strengthens work incentives for low earners.
Why increase taxes?
If economic growth and inflation are too high, the government can increase taxes to reduce consumer spending and reduce economic growth.
Why increase government spending?
During a downturn in the business cycle, the government increases their spending to fill the gap in aggregate demand in order to stimulate the economy and reduce poverty.
