2.6.2- Demand Side Policies UNFINISHED Flashcards

1
Q

What is a demand side policy?

A

Policies designed to manipulate consumer demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is monetary policy?

A

Control of the money supply by altering interest rates and quantative easing to control the level of AD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does the money supply include?

A

-narrow money
-broad money

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is narrow money?

A

Notes and coins in circulation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is broad money?

A

Narrow money+ bank balances + credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is fiscal policy?

A

Use of borrowing, gov spending and taxation to manipulate the level of AD and improve macroeconomic performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Who controls interest rates in the UK?

A

The monetary policy committee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the monetary policy committee?

A

Nine members who meet each month independent from the government to discuss what the rate of interest should be

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Why does a rise in interest rates cause a fall in AD?

A

-increases the cost of borrowing, leading to a fall in investment and consumption
-less borrowing so fall in demand for assets, leading to a negative wealth effect as the value of assets falls
-less confidence
-increased incentive for foreigners to hold their money in British banks, so the value of the pound rises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How do you evaluate interest rates?

A

-may take up to 2 years to have their full effect
-exchange rate may be affected lots
-interest rates may be so low that they can’t be decreased further
-not all interest rates are affected by the BoE base rate
-lack of confidence may mean people don’t want to borrow and banks don’t want to lend
-high interest rates over time will discourage investment, decreasing LRAS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is quantitative easing?

A

When central banks create new electronic money, then buy gov bonds, therefore increases the price of bonds, which reduces the yields on bonds, so financial institutions have more cash so they lend more

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is a negative wealth effect?

A

Value of assets fall, decreasing confidence, therefore consumption decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What will QE result in?

A

-Increased investment
-positive wealth effect
-commercial banks may lower their interest rates as they are receiving lots of money from the BoE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the negative impacts of QE?

A

-‘like heroin’, with short term highs and side effects like inflation
-don’t know what will happen when the BoE starts to unwind QE (sell bonds)
-banks can hold onto money to improve liquidity issues, so may not help demand
-not meant to be permanent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How can the government increase AD through fiscal policy?

A

-rise tax
-rise government expenditure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the annual government budget?

A

Plans for spending, borrowing, and taxation for the year ahead

17
Q

What are the top 4 highest revenue raising taxes?

A

-income tax (25% of revenue)
-national insurance
-VAT
-corporation tax

18
Q

What are some other examples of taxes?

A

-council tax
-excise duties
-capital gains tax
-inheritance tax
-stamp duty land tax

19
Q

What is the value of the UK’s national debt?

A

£2.7 trillion

20
Q

How is national debt financed?

A
  1. Selling of gov’t bonds
  2. Global banks
  3. Other govts/ political institutions eg. EU
  4. World bank, International Monetary Fund
21
Q

Why don’t we want to borrow from the world bank?

A

There are strings attached like open economy and liberalise trade and democracy

22
Q

How is fiscal policy evaluated?

A
  1. Takes longer than monetary policy
  2. Trade offs between objectives
  3. Less precise, can affect AD, SRAS, LRAS
  4. Taxes and spending have an impact on inequality
  5. Political issues, may not raise taxes as don’t want to be unpopular
  6. Depends on the multiplier