demand side policy Flashcards
What are the two demand-side policies?
– Monetary policy – fiscal policy
How can Monetary Policy boost Aggregate Demand?
By cutting Interest Rates
What is meant by tight fiscal policy?
- Decreasing AD - Government will cut Government Spending (G) and/or increase taxes - Higher taxes reduces consumer spending
Evaluative points for expansionary fiscal policy.
worsen the BOP on current account if additional disposable income is spent on imports , and the government will need to increase borrowing.
can lead to a high price level which could hamper the inflation target
What is the aim of Demand Side Policies
Increase Aggregate Demand
What is meant by a Negative Wealth Affect?
Where lower asset prices mean that people feel less inclined to spend.
Evaluative points for Monetary Policy. specfifcaklky interest rates
- Raises the cost of production and causes inflation - Takes 18 months to 2 years for interest rates to have their full impact (further delays because many mortgage holders have fixed rate policies, which delays the impact of their spending for some years) - Monetary Policy hits the whole economy big and small businesses. - Rising Interest Rates usually worsens income distribution
Evaluative points for fiscal policy.
– It depends on the size of the Multiplier - Depends on the state of the economy (works best in deep recession, Liquidity trap,
Which is more effective Monetary or Fiscal Policy?
- Monetary Policy is set by the Bank of England and therefore reduced political influence - Monetary Policy is quicker to implement. - Monetary Policy is inefficient during a Liquidity trap
What is meant by the term monetary transmissions mechanisms?
Changing the rate of interest set off a chain reaction is in the economy which means that aggregate demand will shift
In Monetary Policy, how do Lower Interest Rates boost Aggregate Demand?
- Reduce the cost of borrowing - Encouraging investment and consumer spending - Reduces the incentive to save, making spending look more attractive instead - Lower mortgage interest payments increasing disposable incomes for consumers
Drawbacks of Using Quantitative Easing.
- Greater inflow of money to the banks has caused them to take greater risks - Causes Inflation
What are Government bonds?
where you loan money to a government in return for an agreed rate of interest.
What will happen if Demand Side Policies are used in an economy which is already close to full capacity?
It will mainly cause inflation
What is meant by the term monetary policy?
Using monetary instruments such as the interest rate and quantitive easing to influence the levels of spending and Aggregate Demand
What factor causes Quantitative Easing to not achieve its full potential?
- Nature of Banks • Boosting the value of a banks assets and their holding of liquid assets as a result of QE would expect banks to lend more •But after the global financial crisis banks are concerned about their health and as a result are less willing to lend
What is meant by the term fiscal policy?
Is the manipulation of taxes and government spending to influence the overall level of demand in economy
What is meant by the term demand-side policies?
Is the deliberate manipulation by the government of aggregate demand in order to achieve macro economic objectives.
When can Demand Side Policies be used?
during a recession - A period below trend growth
How does Quantitative Easing Work?
- Central Bank creates new money electronically (by adding it to its balance sheet) - This Money is used to buy financial assets (government bonds) - More Demand leads to higher prices of assets (Rise in the price of bonds leads to a lower yield for GOVERNMENT bonds) - Can cause a fall in long term interest rates - Lower Interest rates and more cash in the banking system stimulates AD through a rise in consumption and investment
By conducting Quantitative Easing does the government print new money?
NO it produced it electronically
What must there be in an economy in order for Demand Side Policies to work effectively?
Spare Capacity (or a negative output gap)
What are the problems with using Quantitative Easing to boost Aggregate Demand?
- By Increasing the money supply will cause inflation However, during 2009-12 when QE was used Inflation caused by QE was minimal - Though QE alone failed to return the economy back to normal growth projection
what takes longer fiscal or monetary
While there will always be a lag in its effects, fiscal policy seems to have a greater effect over long periods of time and monetary policy has proven to have some short-term success.
