Macro exam essay revision (Supply side policies, Fiscal, Monetary policy)

Question 1

Define supply side policies

Answer 1

Government policies designed to increase the productive potential of the economy and push the long run aggregate supply curve to the right

Question 2

Effects of supply side policies

Answer 2

Increase in economic growth

Reduces inflationary pressures

Question 3

Which supply side policies are in the labour market?

Answer 3

• education and training: high cost and long-term consequences
• health care: only small impact
• infrastructure: increases labour mobility
• less power for unions, decrease minimum wage
• decrease marginal tax rates(direct taxes) –> increase incentive to work& start up a businesss: decreasing equality

Question 4

Which supply side policies are in the goods market?

Answer 4

-subsidize R&D

• subsidies
• encourage small business: less likely to exploit consumers
• infrastructure: increases efficiency of how goods are moved
• encourage free trade
• privatisation
• deregulation

Question 5

Factors that influence short-run aggregate supply

Answer 5

• Trade union
• Lack of skills: So that job vacancies cannot be filled
• Geographical immobolity

Question 6

Define direct tax

Answer 6

Tax that is paid directly by an individual or organization to the imposing entity

Shifts Demand in

Question 7

Define indirect tax

Answer 7

Tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products

Shifts Supply Up

Question 8

Define multiplier effect

Answer 8

An initial injection/ expenditure will lead to greater increase in National Income

Question 9

Define monetary policy

Answer 9

Monetary policy consists of the actions of a central bank that determine the size of the money supply, which in turn affects interest rates.

Question 10

What are the flaws of fiscal policy?

Answer 10

not effective if MPC is low

increases AD which in turn increases interest rates which decreases future investment and consumer spending

can lead to crowding out

debt can be expensive and not manageable

inflationary pressures

not perfect knowledge: government failure

some polices are very long-term

knock-on effects

Question 11

What are the problems of monetary policy?

Answer 11

• potential for liquidity trap
• time delay
• inflationary pressures