political

Question 1

what is the monetary policy ?

Answer 1

involves the use of interest rates and the manipulation of the money supply to influence levels of consumer spending and aggregate demand in an economy

Question 2

what is the main aim of the monetary policy ?

Answer 2

to create a stable economic environment by maintaining low rates of inflation

Question 3

what key element of the monetary policy does the bank of england control ?

Answer 3

since 1997 the setting of interest rates has been controlled by the bank of england

Question 4

how does the monetary policy work ?

Answer 4

• government set an inflation target
• the bank of england studies inflationary trends in the uk
• they decide if inflation is likely to rise or fall through a meeting
• if inflation is expected to rise interest rates may rise, if falling interest rates might be cut
• if interest rates change there is a change in the cost of borrowing money for consumers and businesses
• could encourage extra spending or discourage borrowing meaning less spending and investment

Question 5

what happens to businesses who sell luxury goods ?

• monetary policy

Answer 5

luxury goods (income elastic) are likely to see a sharp fall in sales

consumers cut back on non-essential spending

Question 6

what happens to businesses who sell inferior goods ?

• monetary policy

Answer 6

inferior goods might experience a growth in sales

depends upon the size of the increase in interest rates

Question 7

business and monetary policy ?

if interest rates rise :

Answer 7

consumers have to use more of their personal disposable income (PDI) to repay the mortgage as the interest payments on the mortgage will rise

consumers have less money available to spend on essentials such as food

businesses will also experience a rise in their costs as they are likely to hold loans, possible drop in demand for goods and services : lower profit margins + cut in planned investment

Question 8

what is the fiscal policy ?

Answer 8

government measures that involve changes in spending or taxation in order to influence levels of demand and economic activity within an economy

Question 9

what are the main aims of the fiscal policy ?

Answer 9

• to stimulate economic growth during periods of economic downturn
• to maintain low and stable rates of inflation
• to provide economic stability avoiding ‘boom and bust’ economics

Question 10

what two categories is the fiscal policy split into ?

Answer 10

expansionary fiscal policy

contractionary fiscal policy

Question 11

what is the expansionary fiscal policy ?

Answer 11

the government will increase spending and cut taxes in an effort to stimulate economic growth

Question 12

what happens when using the expansionary fiscal policy ?

Answer 12

lower taxes increase consumer spending because they have more disposable income

this means additional revenue for businesses and increased demand
- this encourages firms to hire more staff and push forward with investment as confidence levels increase

Question 13

what is the contractionary fiscal policy ?

Answer 13

the government will decrease spending and raise taxes in an effort to suppress economic growth

Question 14

what happens when using the contractionary fiscal policy ?

Answer 14

higher taxes decrease consumer spending because they have less disposable income

businesses might also see their taxes rise and this increase in their costs and a loss in demand will cause job losses and cut backs on investment

Question 15

fiscal policy and businesses ?

Answer 15

impact largely depends upon the size of the changes to government spending and taxation rates

levels of business and consumer confidence are very important determinants in economic growth

when taxes rise consumers are more likely to save - reduces demand for business goods and services

governments have to consider their own levels of borrowing