Macroeconomic Policy Instruments

Question 1

What is fiscal policy?

Answer 1

A type of policy used by the government to influence the economy or individuals, using mainly government spending and taxation

Question 2

What are the two kinds fiscal policies?

Answer 2

Expansionary fiscal policy, which involves increasing AD
Contractionary fiscal policy, which involves reducing AD

Question 3

Why is expansionary fiscal policy likely to be used during a recession?

Answer 3

It will increase economic growth and reduce unemployment, it may also increase inflation and worsen balance of payments

Question 4

Why is contractionary fiscal policy likely to be used during a boom?

Answer 4

It will reduce price levels and improve the balance of payments, but it may decrease economic growth and increase unemployment

Question 5

What is an automatic stabiliser?

Answer 5

When some of a government’s fiscal policy may automatically react to changes in the economic cycle

Question 6

What is progressive tax?

Answer 6

When an individual’s taxes rises, as a percentage of their income, as their income rises

Question 7

What is regressive tax?

Answer 7

When an individual’s taxes fall, as a percentage of their income, as their income rises

Question 8

What is proportional tax?

Answer 8

When everyone pays the same tax regardless of their income level

Question 9

What can government spending be affected by?

Answer 9

• Size of a population
• Government policies on inequality, poverty and redistribution of income

Question 10

How is a budget deficit paid for?

Answer 10

Public sector borrowing

Question 11

What are the problems linked with excessive borrowing?

Answer 11

• Demand pull inflation
• Rise in inflation and interest rates
• Rise in national debt
• Less foreign direct investment

Question 12

What is the golden rule in borrowing for the government?

Answer 12

The government can borrow to invest in things like infrastructure, which can make for future growth, but cannot borrow to fund current expenditure

Question 13

What is monetary policy?

Answer 13

A policy that involves making decisions about interest rates, the money supply and exchange rates

Question 14

What does the MPC do?

Answer 14

Sets interest rates in order to meet the inflation target set by the government

Question 15

What are the effects of an increase in interest rates?

Answer 15

• Less borrowing
• Less consumer spending
• Less investment
• Less confidence among consumer & firms
• More saving
• Decrease in exports
• Increase in imports

Question 16

What is the aim supply side policies?

Answer 16

To expand the productive potential or increase the trend rate of growth

Question 17

What are the 2 types of supply side policies?

Answer 17

Free market and interventionist

Question 18

What is a free market supply side policy?

Answer 18

Policies that aim to increase efficiency by removing things which interfere in the free market. E.g. tax cuts, privatisation, deregulation

Question 19

What is an interventionist supply side policy?

Answer 19

A policy aimed at correcting market failure

Question 20

What is the purpose of using supply and demand side policies together?

Answer 20

Supply side policies create long run growth, demand side policies stabilise the economy in the short run

Question 21

What do Keynesian economist believe?

Answer 21

That the government needs to intervene to get the economy closer to full employment

Question 22

What do classical economists believe?

Answer 22

That the economy usually operates at full capacity and employment on its own

Question 23

What is quantitative easing?

Answer 23

When money is injected into the economy to stimulate aggregate demand at a time when interest rates are already very low

Question 24

How does quantitative easing work?

Answer 24

It increases the money supply by selling government bonds creating new money and using it to buy assets owned by other financial institutions. The hope is that this will cause an increase in spending and lending

Question 25

What are the advantages of a budget deficit?

Answer 25

• Higher growth, lower unemployment
• Increased Gov Spending
• Redistribution of income
• Incentives of tax cuts
• Crowding In effect

Question 26

What are the disadvantages of a budget deficit?

Answer 26

• Worsening Gov finances
• Inflation Conflict
• Current account deficit conflict
• Crowding out effect
• X - efficiency

Question 27

What is a structural budget deficit?

Answer 27

A budget deficit at full employment

Question 28

What is a cyclical budget deficit?

Answer 28

A budget deficit in a recession

Question 29

What are the advantages of a budget surplus?

Answer 29

• Confidence in Gov finances
• Flexibility with fiscal policy
• Less crowding out/ X inefficiency
• Lower inflation and CA deficit