Policies Flashcards
Demand side
Fiscal + monetary
Fiscal policies are
Either expansionary or contractionary
Changes to GS and T to influence AD
Expansionary
- Boost growth
- Reduce unemployment
- Increase inflation
- Redistribute income
EVAL expansionary fiscal
- depends on ME
- Covid can affect confidence
- significance of fiscal
- time lag
- taxes are regressive as poor have higher MPC
- inflation has unequal impacts
Contractionary
- Reduce inflation
- Reduce budget deficit/ national debt
- Redistribute income
- Reduce current account deficit
Eg, increase income/ corporation tax or decrease government spending
Eval contractionary fiscal policy
- time lag
- negative ME
- taxes burden poor more
- reduce investor confidence + FDI
- malign deflation
- significance
- laffer
Effects of fiscal policies on LRAS
- incentive to work
- incentive to invest
Monetary policy
Expansionary or contractionary
Changes to interest rates, money supply and exchange rates by central bank to influence AD
Expansionary/ contractionary MP
Expansionary – increase AD – increase inflation (central bank mandate), increase growth, reduce unemployment
Contractionary – decrease AD – reduce inflation, prevent asset/ credit bubbles, reduce excess debt, and promote saving + reduce current account deficit
Potential side effects of MP
low interest rates can stimulate investment = higher quantity/ quality of capital goods = increased productive efficiency = outward shift of LRAS
- also QE can improve confidence
Downsides of MP
- Demand-Pull inflation (effect on different stakeholders?)
- Current account deficit increases (will there be a shift in AD?)
- Time lags – takes long time for interest rate cut to feed through the channel of transmission mechanism
Evaluate MP
- size of output gap
- school of thought
- significance of ME
- state of economy
- willingness of bank to lend
- confidence
- significance of rate cut
- macro objectives
What is QE
- central bank purchases long term financial assets from banks, so more money supply in economy, lowers interest rates further and provides liquidity to banking systems
- since bank buying assets, rise in demand for assets and asset prices rise = positive wealth effect = more wealth = higher consumption = stimulate AD.
Risks of QE
- inflationary pressures
- limited lending
- may devalue currency
- no guarantee
- time lag
- significance
Supply side policies
- Aim to increase the productive potential of the economy
- By increasing quantity/ quality of FoP
- Or improving efficiency of markets
- Can be interventionist or free market promoting
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