Demand-side Policies

Question 1

Investment in human capital

Answer 1

Inequality of opportunity is a major factor leading to income and wealth inequalities

Question 2

Demand-side policies

Answer 2

Government or Central Bank policies designed to influence the level of economic activity of an economy through direct or indirect influences on one or more of the components of AD

Question 3

Commercial Banks

Answer 3

Functions
- Hold deposits of customers
- Make loans to customers
- Transfer funds to other financial institutions
- Buy Government bonds

Question 4

Central Banks

Answer 4

Functions
- Banker to Government
- Banker to commercial banks
- Regulator commercial banks
- Conduct Monetary policy

Question 5

Monetary policy

Answer 5

A demand-sided policy implemented by a nations central bank where by adjustments are made to the official interest rate influencing commercial interest rates and thus consumption, investment and net exports

Question 6

Expansionary Policy - MP

Answer 6

Increase AD (easy to borrow) interest rates goes down

Question 7

Contractionary Policy - MP

Answer 7

Decrease AD (tight to borrow) interest rates goes up

Question 8

Transmission

Answer 8

Lower interest rates increase AD by stimulating spending

Question 9

Money Supply

Answer 9

All currency and All bank deposits

Question 10

Tools for Monetary Policy

Answer 10

• Open market operations
• Minimum reserve requirements
• Changes in central bank minimum lending rates
• Quantitative easing

Question 11

Saving and investment channel

Answer 11

Interest rates influence economic activity by changing the incentives for saving and investments

Question 12

Cash flow channel

Answer 12

Interest rates influence the decision of households and businesses by changing the amount of cash they have available to spend on goods and services

Question 13

Assets prices and wealth channel

Answer 13

Asset prices and people’s wealth influence how much they can borrow and how much they spend in the economy. The assets prices and wealth channel typically affects consumption and investment

Question 14

Exchange rate channel

Answer 14

The exchange rate can have an important influence on economic activity and inflation by impacting on sectors that are export oriented or exposed to competition from imported goods and services

Question 15

Fiscal Policy

Answer 15

A demand-sided policy involving deliberate actions by the government to alter the value and or direction of government spending and or taxation

Question 16

Expansionary Policy - FP

Answer 16

Increase AD, decrease tax rates and increase consumption investment

Question 17

Contractionary Policy - FP

Answer 17

Decrease AD, increase tax rates and decrease consumption investment

Question 18

Fiscal Policy

Answer 18

Fiscal policy in implemented through the governments budget. A budget is a financial document detailing all sources of government revenue and expected expenditures. A budget is enacted as legislation so must pass through parliament.

Question 19

Objective of Fiscal Policy

Answer 19

• Low and stable rates of inflation
• Low rates of unemployment
• Reduced fluctuations in economic activity
• Stable economy for long term growth
• External balance
• Equitable distributions of income

Question 20

A balance budget

Answer 20

Expenditure = Revenue

Question 21

A budget surplus

Answer 21

Expenditure < Revenue

Reduce national debt
Injection are less than leakages

Question 22

A budget deficit

Answer 22

Expenditure > Revenue

Add national debt
Injection exceed leakages

Question 23

Distinct categories of government spending

Answer 23

Current expenditure
Capital expenditure - Infrastructure
Transfers