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 increase the productive capacity of the economy by improving the efficiency and productivity of factors of production

Question 17

What are the 2 types of supply side policies?

Answer 17

Investment in education and training
Deregulation

Question 18

What is a free market supply side policy?

Answer 18

It focuses on reducing government intervention to allow market forces to improve the supply-side of the economy.

Question 19

What is an interventionist supply side policy?

Answer 19

A policy where the government actively intervenes in the economy to improve the supply of goods and services

Question 20

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

Answer 20

Balanced economic growth
Addresses different economic problems
Stabilises inflation
Reduces unemployment

Question 21

What do Keynesian economist believe?

Answer 21

Active government intervention
Demand-side focus
Short-run focus
Government spending during recession
Sticky prices and wages
Monetary policy

Question 22

What do classical economists believe?

Answer 22

Market self-correction
Supply-side focus
Long-run focus
Flexible prices and wages
Limit government intervention
No need for fiscal stimulus
Say’s Law

Question 23

What is quantitative easing?

Answer 23

A monetary policy used by central banks to increase the money supply and stimulate economic activity when interest rates are already close to zero and traditional monetary policy tools are no longer effective

Question 24

How does quantitative easing work?

Answer 24

Central bank buys financial assets, typically government bonds or other securities, from banks and financial institutions. This increases the reserves of those institutions, encouraging them to lend more and lower interest rates on loans

Question 25

What are the advantages of a budget deficit?

Answer 25

Stimulates economic growth
Provides funding for investment
Supports employment
Low interest rates
Fiscal flexibility

Question 26

What are the disadvantages of a budget deficit?

Answer 26

Increased national debt
Higher interest rates if done excessively
Inflationary pressure
Lower investor confidence
Dependence on borrowing
Potential for austerity

Question 27

What is a structural budget deficit?

Answer 27

A permanent or long-term deficit that exists even when the economy is operating at its full potential

Question 28

What is a cyclical budget deficit?

Answer 28

A temporary budget deficit that occurs due to fluctuations in the business cycle, particularly during periods of economic downturn or recession

Question 29

What are the advantages of a budget surplus?

Answer 29

Reduced national debt
Lower interest rates
Increased confidence
Improved infrastructure
Prevents inflationary pressures

Question 30

What are the disadvantages of a budget surplus?

Answer 30

Reduced government spending
Negative impact on AD
Higher taxes
Public services under pressure
Decreased investment