Macroeconomic Policies

Question 1

Demand-Side Policies

Answer 1

Fiscal policy and Monetary Policy

Question 2

Supply-Side Policies

Answer 2

Any measures that aim to increase quantity and quantity of factors of production. Eg. investment and incentives

Question 3

Fiscal Policy

Answer 3

Changes in government spending and taxation

Question 4

Monetary Policy

Answer 4

Changes in interest rates, money supply and QE (quantitative easing)

Question 5

QE (Quantitative Easing)

Answer 5

Central bank electronically creates money and uses it to buy bonds, aiming to increase money supply and increase liquidity in financial markets.

Question 6

Investment (supply-side policy)

Answer 6

Includes:

• Education / Training (more knowledge more productive)
• Healthcare (Longer life expectancy more hours of work)
• Infrastructure (More motorways, airports and therefore lower costs)

Question 7

Incentives (supply-side policy)

Answer 7

Includes:

• Decrease income taxes (people are awarded more, so have incentive to work harder and longer)
• Lower corporation taxes (people invest more)

Question 8

Contractionary Fiscal Policy

Answer 8

To Reduce Inflation. Increase in taxes, decrease in government spending. This leads to lower government spending, consumption, investment, and lower Aggregate Demand

Question 9

Contractionary Monetary Policy

Answer 9

To Reduce Inflation. Increase in interest rates (currency appreciates because there is more demand for saving, so more people buy that currency), decrease in money supply. This leads to lower consumption, investment, net exports and lower Aggregate Demand

Question 10

Expansionary Fiscal Policy

Answer 10

To Address Deflation. Decrease in taxes, increase in government spending. This leads to increase in government spending, consumption, investment, and higher Aggregate Demand

Question 11

Expansionary Monetary Policy

Answer 11

To Address Deflation. Decrease in interest rates (currency depreciates because there is less demand for saving, so less people buy that currency), increase in money supply. This leads to higher consumption, investment, net exports and higher Aggregate Demand

Question 12

Disadvantages of fiscal policy

Answer 12

(short & long term effect)

• increase in income tax, workers negotiate for higher wages, cost-push inflation
• workers might also work less, disincentive effect, lower productivity, lower AS
• *resolve short term problem- but get long term problem
• increase corporation tax, less profits, invest less, damage long term growth
• most effective when economy is at full capacity

Question 13

Disadvantages of monetary policy

Answer 13

• consumer/business might still have high confidence, spending + investment carry on to be high
• increase interest rate, appreciation of currency, uncompetitive exports, worsen current account position

**not effective if demand-pull is caused by too much G

Question 14

Disadvantages of supply-side policy

Answer 14

• takes time

- outcome uncertain

Question 15

Any short-term solution dealing with cost-push?

Answer 15

Raise exchange rate (if using fixed exchange rate system). Currency appreciate, imports cheaper, reduce cost-push inflation, AS shifts rightward