Policies (CH 22)

Question 1

Define Fiscal Policy

Answer 1

Government’s use of taxation and spending to influence the economy

Question 2

Define the budget position

Answer 2

Whether the government has a deficit, surplus or if the budget is balanced

Question 3

Define budget surplus

Answer 3

Tax receipts exceed expenditure

Question 4

Define budget deficit

Answer 4

Expenditure exceeds tax receipts in a financial year

Question 5

Define budget balance

Answer 5

Expenditure is equal to revenue

Question 6

Define National debt

Answer 6

Amount of money the government has borrowed at one time through issuing securities by treasury

Question 7

What is contractionary fiscal policy?

Answer 7

Aims to reduce spending in the economy in order to avoid overheating and high inflation rates reducing aggregate demand

Question 8

Features of contractionary fiscal policy

Answer 8

-Decrease government spending
- Increase taxes
- Improvement of the government budget deficit

Question 9

What is expansionary fiscal policy?

Answer 9

Government increases spending and reduces taxes to do this. Leads to a worsening of government budget deficit

• aims to increase AD ( for economic growth)
• government may need to borrow more to finance this

Question 10

Features of expansionary fiscal policy

Answer 10

• Increase spending
• Tax cuts
• Transfer payments
• Higher output employment
• Higher price levels

Question 11

Limitations of fiscal policy

Answer 11

• Government might have inaccurate information about the economy. Leads to inefficient spending
• Tax lag conducting/employing fiscal policy
• If government spend too much, can be risk to pay debt back which makes it difficult to borrow in the future

Question 12

What is the monetary policy used for?

Answer 12

Used by the government to control the flow of the economy. Done with interest rates

Question 13

MPC interest rates

Answer 13

• Monetary policy committee
• Alters interest rate and the supply of money
• Meet monthly to alter interest rates
• Main target 2% CPI
• Alters cost of borrowing + reward for saving

Question 14

What impact does banks controlling base rates have on the economy?

Answer 14

Ultimately controls interest rates across the economy

Question 15

Limitations of monetary policy

Answer 15

• Bank might not pass base rate onto consumers
• Consumers might be able to borrow as banks could be unwilling t lend

Question 16

Explain the use of supply-side polcies

Answer 16

Aims to improve long run of productive potential in the economy

• increases quantity of factors of production
• aims to increase aggregate supply

Question 17

Types of supply-sides policies

Answer 17

• Education and training
• Reforming tax + benefit/reducing marginal taxes
• Privatisation and Regulation
• Subsidies

Question 18

State causes of exchange rate changes

Answer 18

• Inflation
• Interest rates
• Government intervention
• Government finances

Question 19

Explain how low inflation can influence exchange rate changes

Answer 19

Low inflation means exports are relatively more competitive. This increases demand for currency and currency appreciates.

Question 20

Explain how an increase in interest rates can influence exchange rate changes

Answer 20

Increase in Interest rate attract investments in nation- as rate of return on investment is higher- which increases demand for currency - appreciating effect = Hot Money