macroeconomic policy

Question 1

what is a contractionary fiscal policy?

Answer 1

when tax rates are increased and/or government spending is reduced, this decreases AD and reduces the rate of inflation

Question 2

what is an expansionary fiscal policy?

Answer 2

when tax rates are decreased and/or government spending is increased, this increases AD and increases the rate of inflation

Question 3

what is monetary policy?

Answer 3

involves the central banks taking action to influence the manipulation of interest rates, the supply of money and credit, and the exchange rate

Question 4

what are the two causes of inflation?

Answer 4

• demand-pull
• cost-push

Question 5

what is demand-pull inflation?

Answer 5

• a period of inflation which arises from rapid growth in aggregate demand
• occurs when demand for goods and services exceeds supply in the economy

Question 6

explain the concept of demand-pull inflation

Answer 6

• if the economy is at or close to full employment, then an increase in AD leads to an increase in the price level
• this is because, firms reach full capacity and they respond to the rapid increase in AD by putting up the prices, leading to inflation

Question 7

what is a direct tax?

Answer 7

• a tax levied directly on an individual or organisation e.g. income and corporation taxes
• the taxpayer pays the tax directly to the government, so the tax liability cannot be passed to someone else

Question 8

what is an indirect tax?

Answer 8

• a tax levied on expenditure on a good or service e.g. VAT
• the tax is imposed on producers but they are able to pass on the liability of the tax to the consumer (in the form of higher price) if they wish