Demand-side Policies

Question 1

Monetary Policy

Answer 1

A manipulation by the government of monetary variables, such as interest rates and the money supply, in order to achieve its objectives.

Quantitative easing is a monetary policy.

Eg increasing interest rates in order to encourage savings, discourage spending/borrowing. This has many affects such as controlling inflation and economic growth, but may lead to increase in unemployment

Question 2

Fiscal Policy

Answer 2

Is the use of taxes, government spending and government borrowing to achieve its objectives.

• Discretionary Fiscal Policy - Deliberate government policy to alter spending and tax rates to influence AD in the economy.
• Automatic Stabilisers - Changes in tax revenue and spending that occur because of changes in GDP.

Question 3

Quantitative Easing

Answer 3

When the central bank buys bonds from banks in exchange for money. The commercial bank now holds fewer bonds, or loans, and more money. It can then lend out that money to customers. Those customers may be firms wanting to borrow to invest in new equipment. It might be households wanting to buy a new car or new kitchen. Higher investment and high consumption increases AD

Question 4

Expansionary Fiscal/Monetary Policy

Answer 4

Fiscal/Monetary Policy which leads to an increase in AD

Question 5

Contractionary Fiscal/Monetary Policy

Answer 5

Fiscal/Monetary Policy which leads to a fall in AD

Question 6

Budget Deficit/Surplus

Answer 6

When GS>Tax(Income) or GS

Question 7

National Debt

Answer 7

The total accumulated borrowing of government which remains to be paid to lenders.

Question 8

Neutral Fiscal Policy

Answer 8

When changes to government spending and taxation leave the overall budget surplus or deficit unchanged and have no effect on aggregate demand.

Question 9

Loose Monetary Policy

Tight Monetary Policy

Answer 9

Decrease interest rates if rapid economic decline is apparent.

Increase interest rates if rapid economic growth is apparent.