Government Policies and Conflicts

Question 1

What is Monetary Policy?

Answer 1

The manipulation of interest rates or quantitative easing to achieve macroeconomic objectives, mainly controlling inflation.

Question 2

Who sets the interest rates?

Answer 2

The Monetary Policy Committee.

Question 3

What is Quantitative Easing and how does it work?

Answer 3

The MPC ‘buys debt’ from banks to increase the supply of lendable money to banks.

Question 4

What problems are associated with the effectiveness of Monetary Policy?

Answer 4

There is an 18-24 month time lag.

Question 5

What effect will rising interest rates have on the strength of the currency?

Answer 5

A rise in interest rates will likely strengthen the pound against other currencies as demand for the currency goes up as foreign investors buy more pounds when interest rates are high.

Question 6

What are the three types of policy the government can implement to shift aggregate demand or supply?

Answer 6

Fiscal, Monetary and Supply-Side Policy.

Question 7

What does fiscal policy involve?

Answer 7

The planned amount of taxation, government spending and how much debt to take out/pay back. Fiscal policy is intended to influence the level of spending in the economy.

Question 8

What is Reflationary/Expansionary Fiscal Policy and what does it involve?

Answer 8

Reflationary policy is the decrease of taxation and increase of government spending to increase aggregate demand (tends to increase inflation).

Question 9

What is Deflationary/Contractionary Fiscal Policy and what does it involve?

Answer 9

Deflationary policy involves increasing taxation and decreasing government spending to decrease aggregate demand and reduce the budget deficit (tends to decrease inflation)

Question 10

When does a budget deficit occur and what affect does it have on aggregate demand?

Answer 10

When government spending exceeds its tax receipts. This causes aggregate demand to increase.

Question 11

When does a budget surplus occur and what affect does it have on aggregate demand?

Answer 11

When government spending is less than its tax receipts. This causes Aggregate Demand to decrease.

Question 12

What change will occur on an AD/AS Diagram upon implementation of Contractionary Policy?

Answer 12

The AD curve will shift to the left.

Question 13

What change will occur on an AD/AS curve upon implementation of reflationary policy?

Answer 13

The AD curve will shift to the right.

Question 14

What are the three major types of Supply-Side policy?

Answer 14

Labour Market policy, policy to cut costs for firms, and policy to improve competition between firms.

Question 15

What do Labour Market Policies aim to do and what are some examples?

Answer 15

They aim to make the workforce more effective and productive. E.g. Improvement of education and training (long term) or cutting benefits to incentivise workers (short term).

Question 16

What is an example of a supply side policy to improve competitiveness between firms?

Answer 16

Removing patents to make it easier for new firms to set up.

Question 17

Give examples of a supply side policy that cuts costs for firms.

Answer 17

Cutting Taxes or reducing the National Minimum wage.

Question 18

What affect will supply side policies theoretically ALWAYS have on an AS/AD diagram?

Answer 18

The AS curve will shift to the right, decreasing the General Price Level and increasing real equilibrium output.

Question 19

What affect will reflationary fiscal policy have on monetary policy?

Answer 19

The MPC may react to the increasing effect on inflation by raising interest rates.

Question 20

What effect will deflationary fiscal policy have on monetary policy?

Answer 20

The MPC will likely react to the decrease in inflation by cutting interest rates.

Question 21

What effect may rising interest rates have on aggregate supply?

Answer 21

Interest rates rising will increase costs of production for firms which may decrease Aggregate Supply.

Question 22

What effect may falling interest rates have on aggregate supply?

Answer 22

Falling interest rates will decrease costs of production for firms, increasing aggregate supply.

Question 23

Short term, how does supply side policy affect the budget deficit?

Answer 23

Supply side policy tends to increase the budget deficit due to the increased level of government spending required to implement.

Question 24

Long term, what affect may supply side policy have on the budget deficit?

Answer 24

Supply side policy will likely decrease the budget deficit if it is successful in the long term, because the effects of the policy will definitely be in full effect.