Policies

Question 1

Fiscal policy definition

Answer 1

Changes in Government spending and taxation in order to influence AD

Question 2

Monetary policy definition

Answer 2

Changes in interest rates, money supply and exchange rate by central bank in order to influence AD

Question 3

Supply side policy definition

Answer 3

Aim to increase the productive potential of the economy

By increasing the quantity/quality of factors of production or improving the efficiency of markets

Question 4

Types of supply side policy

Answer 4

Interventionist

Free market oriented

Question 5

Examples of free market oriented supply side policy

Answer 5

Privatization

• Private sector more efficient
• Profit motive to lower cost and improve service

Deregulation

• reduce barriers
• allow new firms to enter
• more competitive

Reduce welfare benefit
- More incentive to get a job

Question 6

Examples of interventionist supply side policy

Answer 6

Education/training
- improve labour productivity

Housing supply

• build affordable council homes in expensive areas
• easier for workers to find jobs in expensive areas reducing geographical immobility
• firms may suffer from labour shortages in expensive areas

Question 7

Benefits of Supply Side Policy

Answer 7

All macro-objectives improved

• High growth
• Low unemployment
• Low inflation
• Improve trade position

Question 8

Disadvantages of supply side policy

Answer 8

Expensive
- opportunity cost

Take a long time to work

Depends on initial level of economic activity
If in recession, ineffective
- no point increasing potential output
- need to increase actual output

Question 9

Policies to reduce demand pull inflation

Answer 9

Contractionary monetary/fiscal policies

• decrease AD
• eg. increase income tax, decrease money supply

BUT
Decreases growth
Increases unemployment
Depends on
- confidence
- initial level of economic activity
- whether if it is offset by other factors

Question 10

Policies to reduce cost push inflation

Answer 10

Reduce cost of production

• G restrict wage rise BUT may lead to inflexible labour market
• Subsidies BUT may promote inefficiency
• Supply side policy

Question 11

Policies to rectify a CAD

Answer 11

Contractionary Fiscal / Monetary Policy

• expenditure reducing policy
• increase income tax, decrease money supply
• BUT conflict with other macro economic objectives
• Depends on: confidence, initial level of economic activity, whether it is offset by other factors

Protectionist Measures

• expenditure switching policy
• tariff, quotas, subsidy
• BUT retaliation, inefficiency

Weaker Exchange Rate

• expenditure switching policy
• sell domestic currency reserves
• BUT imported inflation
• Depends on PED of X and M

Supply Side Policy

• education, privatization
• BUT expensive, long time to work
• Depends on initial level of economic activity