6.2 Demand-side Policies Flashcards
(22 cards)
2 categories?
- Fiscal policy
- Monetary policy
What is fiscal policy?
Involves govt spending and revenue
What are automatic stabilisers?
Natural changes to fiscal policy as an economy moves through the trade cycle
Reasons for govt spending?
1) Provision of public goods
2) Welfare benefits
3) Necessary infrastructure
Main UK sources of tax revenue?
- £800bn overall
- Corp Tax: £55 bn
- Top = Income, National insurance, VAT
Effects of changes in tax?
- Business costs
- Work incentives
- Level of FDI (corp)
- Incentive to start business + invest
What is government borrowing?
Amount government must borrow each year to finance their spending (usually through government bonds)
What is national debt?
Accumulated debt of government from annual budget deficits
Main causes of budget deficit?
- Recession
- Decreased consumption
- Rise in economic inactivity
- Demographics
- Use of fiscal stimulus
Policies to reduce a fiscal budget deficit?
- Cuts in govt spending
- Higher taxes
- Supply-side policies for growth
Effects of a budget deficit?
- Increased AD
- Investment
- Crowding Out
- Tax increases
What is monetary policy?
- Changes to interest rates, credit supply and exchange rates
- Controlled by Monetary Policy Committee
What does monetary stability mean?
Stable prices & confidence in currency
Expansionary monetary policy?
1) Lower interest rates
2) Increase credit supply
3) Depreciation
Deflationary monetary policy?
1) Higher interest rates
2) Decrease credit supply
3) Appreciation
What is the Transmission Mechanism of Monetary Policy (TMMP)?
Explains how changes in monetary policy changes AD, growth and consumer prices
1) MPC raises base interest rate
2) Cost of borrowing increases
3) Higher mortgage rates
4) Slowdown in housing market
5) Contraction in retail credit
6) Higher rates may cause appreciation
7) Makes UK exports more expensive
8) Lower AD
9) Lower inflation
Key roles of central banks?
1) Monetary Policy
2) Financial stability
3) Lender of last resort
4) Debt management
What is Quantitative Easing?
- Form of expansionary monetary policy (Opposite=QT)
1) New electronic money
2) Buy assets form financial institutions
3) Higher liquidity
4) more loans available
AND
3) Increased bond prices and lower yields on other bonds
4) Lower interest rates
Effects of depreciation?
- Higher inflation
- Stronger AD (exports)
Arguments for stimulus following crisis?
- Prevent depression
- Create jobs
- Avoid deflation
- Confidence
Arguments against stimulus following crisis?
- Liquidity Trap
- Moral Hazard
- Impact on savers of monetary policy
- Work Incentives
impacts on AS?
1) Cuts in direct tax = increase labour supply
2) Govt spending leads to FDI
3) Infrastructure spending
