Policy Toolkit Flashcards
Which of the following describes what is meant by fiscal policy ?
Fiscal policy is managed by the government and involves using tax and public expenditure to influence the economy.
Which of the following best describes what is meant by discretionary fiscal policy ?
Discretionary fiscal policy occurs when a government uses their discretion, their ability to make decisions, in order to choose the best policy and make changes. They are actively intervening.
- Automatic Stabilisers
When tax and public expenditure changes happen without government intervention and help to keep the economy stable.
Example of automatic stabaliser
During a boom, public expenditure will automatically decrease and tax revenue will automatically increase. For example, spending on benefits (a transfer payment) will automatically decrease as unemployment decreases. Tax revenue will automatically increase as consumption increases (VAT), profits increase (corporation tax) and incomes increase (income tax).
Which of the following best describes what is meant by monetary policy ?
Monetary policy is conducted by the Bank of England and involves using the base interest rate or the money supply (e.g. quantitative easing) to influence the economy.
Are fiscal policy and monetary policy demand-side or supply-side policies ?
Fiscal policy and monetary policy are both demand-side policies as they aim to influence aggregate demand.
What are the two types of supply-side policy ?
The two types of supply-side policy are interventionist and market-based policy.
Expansionary Monetary Policy
Expansionary (or loose) monetary policy is when the base interest rate decreases or when the central bank uses quantitative easing in order to expand the economy.
- Contractionary Monetary Policy
Contractionary (or tight) monetary policy is when the base interest rate increases in order to contract the economy!
- Interventionist Supply-Side Policy
Interventionist supply-side policy is when the government intervenes, when it is actively involved in increasing aggregate supply.
- Market-Based Supply-Side Policy
Market-based supply-side policy is when the government decides to reduce intervention and let the market do its thing.
There are some government interventions which can overlap between two types of policies. Which two ?
Many supply-side policies require changes in public expenditure or tax which means that they can also be classed as fiscal policy!
Which of the following policies is reducing corporation tax an example of ?
Reducing corporation tax is an expansionary fiscal policy because it is trying to expand the economy by reducing tax rates.
It is also a market-based supply-side policy, because reducing corporation tax will have the effect of decreasing the cost of production and encouraging investment which will increase aggregate supply. It is market-based because the government is reducing its intervention in the economy.
Which of the following policies is increasing education spending an example of ?
Increasing education spending is an expansionary fiscal policy because it is trying to expand the economy by increasing public expenditure.
It is also an interventionist supply-side policy because the government is increasing their involvement by increasing spending on schools, which will increase aggregate supply.
Which of the following policies is increasing government benefits an example of ?
ncreasing government benefits is an expansionary fiscal policy because it is trying to expand the economy by increasing public expenditure.
However, increasing benefits will decrease the incentive to work, which will decrease labour supply. This will increase the wage, which will increase the cost of production and cause a decrease in SRAS. This means that increasing government benefits is not a supply-side policy, as it decreases aggregate supply.
