Macroeconomic Policy Instruments

Question 1

What are the 3 economic policy instruments?

Answer 1

Fiscal policy
Monetary policy
Supply side policy

Question 2

What is fiscal policy?

Answer 2

Involves government subsidies ending and taxation.

Question 3

What are the two types of fiscal policy?

Answer 3

Reflationary fiscal policy

Discretionary fiscal policy

Question 4

What is reflationary Fiscal policy?

Answer 4

Involves boosting aggregate demand by increasing government spending or lowering taxes

Question 5

What is a cost of reflationary fiscal policy?

Answer 5

Likely to involve having a budget deficit.

Question 6

What is deflationary fiscal policy?

Answer 6

Involves reducing government spending or increasing taxes. Likely to involve a budget surplus.

Question 7

The effects of reflationary fiscal policy

Answer 7

• increase economic growth
• reduce unemployment
• increase inflation
• worsen the current account of the balance of payments (more spent on imports)

Question 8

The effects of deflationary fiscal policy

Answer 8

• reduce economic growth
• increase unemployment
• reduce price levels
• improve the current account of the balance of payments (less spent on imports)

Question 9

What are the two features of fiscal policy?

Answer 9

Automatic stabilisers

Discretionary policy

Question 10

What are automatic stabilisers?

Answer 10

Fiscal policy may automatically react to changes in the economic cycle. Eg. In a recession, government spending will automatically increase on spending etc.

Question 11

What is discretionary fiscal policy?

Answer 11

Where governments deliberately change their level of spending and tax.

Question 12

What is government spending split up into?

Answer 12

Current expenditure

Capital expenditure

Question 13

Taxes should be…

Answer 13

Cheap to collect, easy to pay, hard to avoid and shouldn’t create any undesirable disincentives.

Question 14

What is a progressive tax?

Answer 14

Where the individuals taxes rise as their incomes rise in order to redistribute income and reduce poverty.

Question 15

What is a regressive tax?

Answer 15

Where an individuals taxes fall as their income rises. Used to encourage supply side growth and a trickle down effect.

Question 16

What is monetary policy?

Answer 16

Involves making decisions about interest rates, money supply and exchange rates.

Question 17

What are the two types of monetary policy?

Answer 17

Contractionary monetary policy

Expansionary monetary policy

Question 18

What is contractionary monetary policy?

Answer 18

Involves reducing aggregate demand using high interest rates

Question 19

What is expansionary monetary policy?

Answer 19

Involves increasing aggregate demand using low interest rates

Question 20

Is the inflation target symmetric or asymmetric?

Answer 20

Symmetric

Question 21

What are some likely effects of an increase in interest rates?

Answer 21

• high street banks put rates down
• less borrowing
• less consumer spending
• less investment by firms
• less confidence among consumers and firms
• more saving
• a decrease in exports
• an increase in imports
• increase in interest rates

Question 22

What are supply side policies?

Answer 22

Policies that aim to expand the productive potential of an economy

Question 23

Examples of supply side policies

Answer 23

Improvement in education and training
Reducing regulation on firms
Privatisation

Question 24

Problems with fiscal policy?

Answer 24

Takes ages
High taxes - disincentives
Poor info means government might make the wrong decisions on spending and taxes
Can cause a budget deficit

Question 25

Problems with monetary policy?

Answer 25

2 year time lag
Interest rates can negatively affect investment spending
Problem of the dual economy
Liquidity trap

Question 26

Problems with supply side policy

Answer 26

Time lag

Very costly to implement