Macro - Demand-side Policies

Question 1

Monetary policy

Answer 1

Monetary policy involves using interest rates and quantitative easing to affect aggregate demand within the economy, whereas fiscal policy involves using taxation and government spending to affect aggregate demand within the economy

Question 2

fiscal policy

Answer 2

Fiscal policy is controlled by the government. Fiscal policy is the use of Government spending and Taxation in order to influence Aggregate Demand

Question 3

How interest rates affect monetary policy

Answer 3

Interest rates are set by the Bank of England and are mostly influenced by the current inflation rate. The bank sets the base rate which determines the interest rates across the country. If inflation is too high or out of control then the BOE will increase interest rates to influence spending. Higher interest rates encourages people to save rather then spend

Question 4

How quantitive easing affect monetary policy

Answer 4

Quantitative easing was used as a tool for recovery from the 2008 recession after the reduction in interest rates to 0.5% failed. There are a number of reasons why lowering the interest rate may not have the expansionary effect that is intended. One of the reasons for this is the availability of credit.

During the financial crisis, the availability of credit for banks was very low. As a result of this, banks did not have much credit to issue loans out to consumers.

Question 5

How does government spending and taxation affect fiscal policy

Answer 5

The government can either use expansionary or contractionary fiscal policy in order to influence levels of aggregate demand within the economy. An increase in government spending will increase aggregate demand and may even increase the long run aggregate supply of the economy.

A decrease in government spending will cause aggregate demand to fall. Government spending often changes automatically as a result of the implementation of automatic stabilisers. This causes government spending to rise during times of low growth and high unemployment (increased spending on welfare benefits).

Question 6

Government fiscal deficit

Answer 6

A government budget deficit occurs when government expenditure is greater than the revenue it receives from taxation.

Question 7

Government fiscal surplus

Answer 7

A government budget surplus occurs when revenue the government receives from taxation exceeds government expenditure.

Question 8

Direct tax

Answer 8

Direct taxes are paid directly by individuals or firms.

Question 9

Examples of direct taxes

Answer 9

People that are employed pay income tax, firms making a profit pay corporation tax.

Question 10

Indirect tax

Answer 10

indirect taxes are levied on goods/services rather than on income or profits.

Question 11

Examples of indirect taxes

Answer 11

. VAT, alcohol duty, Sugar tax, cigarette tax.

Question 12

Use AD/AS diagrams to illustrate demand-side policies

Answer 12

Demand side policies can either be expansionary, where the aim is to increase aggregate demand within the economy or contractionary, where the aim is to decrease aggregate demand within the economy. Expansionary demand side policies are used in times of low/negative economic growth e.g. a recession. On the other hand, contractionary demand side policies are used in times of high economic growth e.g. a boom.

Question 13

The role and operation of the Bank of England’s Monetary Policy Committee

Answer 13

The main piece of data looked at is the inflation rate. If inflation is getting out of control or is above the inflation target rate (UK inflation target rate is 2% CPI), then the committee may decide to implement contractionary monetary policy (increase in interest rates) to reduce AD and therefore price levels also.