2.6.2- Demand Side Policies UNFINISHED Flashcards
What is a demand side policy?
Policies designed to manipulate consumer demand
What is monetary policy?
Control of the money supply by altering interest rates and quantative easing to control the level of AD
What does the money supply include?
-narrow money
-broad money
What is narrow money?
Notes and coins in circulation
What is broad money?
Narrow money+ bank balances + credit
What is fiscal policy?
Use of borrowing, gov spending and taxation to manipulate the level of AD and improve macroeconomic performance
Who controls interest rates in the UK?
The monetary policy committee
What is the monetary policy committee?
Nine members who meet each month independent from the government to discuss what the rate of interest should be
Why does a rise in interest rates cause a fall in AD?
-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 do you evaluate interest rates?
-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
What is quantitative easing?
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
What is a negative wealth effect?
Value of assets fall, decreasing confidence, therefore consumption decreases
What will QE result in?
-Increased investment
-positive wealth effect
-commercial banks may lower their interest rates as they are receiving lots of money from the BoE
What are the negative impacts of QE?
-‘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 can the government increase AD through fiscal policy?
-rise tax
-rise government expenditure