Demand Side Policy, Supply Side Policies, Policy Conflicts

Question 1

What are the Demand Side Policies

Answer 1

Monetary Policy

Quantitative Easing

Question 2

What is monetary policy

Answer 2

Changes in interest rate, money supply, and exchange rate to influence AD in an economy

Question 3

Who implement monetary policy

Answer 3

Bank of England

Monetary Policy Committee- 9 members- each month, meet and decide appropriate bank rate

Question 4

Explain Transmission Mechanism of Monetary Policy

Answer 4

Increase in bank rate, increase in interest rate

1. Increase interest rate, increase MPS, decrease MPC
2. Credit is expensive to borrow, decrease spending
3. Expectation, decrease confidence, decrease investment
4. Asset Prices, increase mortgage, decrease demand for housing, decrease housing prices, negative wealth effect, decrease spending
   - decrease demand pull inflation
5. Exchange rate, hot money inflow, SPICED
   -decrease cost push inflation

24 months

Question 5

Effect of increase in interest rate

Answer 5

Increase unemployment
Decrease tax revenue
Decrease demand for UK exports
Decrease short run economic growth

Question 6

Define Quantitative Easing

Answer 6

Central bank creating money to buy financial assets to stimulate economy and increase liquidity

Question 7

Explain Quantitative Easing

Answer 7

Electronic money created by central bank
Money used to purchase financial assets from financial institutions- mainly government bonds- increase demand for bonds, increase price for bonds, decrease bond yield

Financial institutions have more cash,(liquidity)- increase lending,
or invest into corporate bonds- increase price of bonds, decrease bond yield- reduce cost of borrowing money- better access to finance- decrease interest rate
shares- increase wealth effect for consumers

Lower yield means lower interest rate
Increase borrowing increasing C and I, increase WIDEC, increase net exports
Positive wealth effect as increase assets and bond prices
Increase economic growth

Question 8

When is QE used

Answer 8

When traditional monetary policy had failed
-there is low availability of credit
-low consumer/ business confidence
-low willingness of bank to lend

Question 9

What is fiscal policy

Answer 9

Deliberate changes in government spending or taxation to influence aggregate demand

Question 10

Main Taxation Revenue

Answer 10

Income tax- £198 billion- 0,20,40,45

VAT- £151 billion

National Insurance Contributions- £147 billion

Question 11

What is NIC

Answer 11

National insurance contributions- contributions paid by workers and employers to the state benefits

Question 12

Why do government increase tax

Answer 12

To increase revenue

Redistribute income

Correct market failure

Influence AD

Question 13

What is direct tax

Answer 13

Tax on income

Income, NICs, corporation tax

Question 14

What is indirect tax

Answer 14

Tax on expenditure

E.g excise duty, VAT

Question 15

What is progressive tax

Answer 15

Percentage of income taken rises as income rises

Question 16

What is Regressive Tax

Answer 16

Percentage of income taken falls as income rises

E.g VAT, excise duties

Question 17

What is Proportional tax

Answer 17

Same percentage paid across all people
NICs

Question 18

What is Laffer Curve

Answer 18

Y: Tax revenue
X: Tax rate

Flipped U shape

As tax rate increases, tax revenue increase until point T* where people would not work as hard to not work at all, as more income they earn is going to the government

Question 19

What are the main government spending

Answer 19

Social Protection- £302 billion

Health- £230 billion

Education- £124 billion

Total Spending- £800 billion per year

Question 20

What are the types of public sector spending

Answer 20

Capital Spending

Current Spending

Transfer Payments

Question 21

What is capital spending

Answer 21

investment in infrastructure- improves future productive capacity-e.g roads/ buildings/ weapons

Question 22

What is Current Spending

Answer 22

day to day expenses of public sector-e.g workers salary

Question 23

What is Transfer Payments

Answer 23

Payments to people who are not productive in economic sense- e.g pensions, unemployment benefits

Question 24

What is Automatic Stabilisers

Answer 24

In booms, income rises, increase consumption, but workers are pushed into higher tax bands, slow down consumption, decrease extent of AD
Lower unemployment, less spending on benefits, decrease extent of AD
-lower demand pull inflation

In recessions, lower income, workers move into lower tax bands, lower average rate of tax, prevent large decrease in consumption
Higher unemployment, higher spending on benefits, increase AD
-prevent deep recessions

Question 25

What is Expansionary fiscal policy

Answer 25

Increase government spending, decrease taxation, increase AD

Question 26

What is contractionary fiscal policy

Answer 26

Decrease government spending, increase taxation, decrease AD

Question 27

What is an evaluate point for fiscal policies and monetary policies

Answer 27

Time lag

Question 28

What is Supply side policies

Answer 28

Policies intended to increase productivity and productive potential of an economy Shifting LRAS to the right

Question 29

What is free market oriented policy

Answer 29

Policies reducing the role of government and improve the incentives to work

Question 30

What are the free market oriented polices (8)

Answer 30

-decrease income tax -decrease corporation tax - reducing trade union power- less wage rises or better working conditions - decrease benefits- improved incentives to work - decrease minimum wage- higher more workers at lower cost - Privatisation- profit motive, increase efficiency, increase output - decrease trade barriers - lower government spending - lower taxation

Question 31

What is interventionist policy

Answer 31

Government promoting polices that aim to increase the economy’s productive potential

Question 32

What is Interventionist Policy

Answer 32

Government promoting policies that aim to increase economy’s productive potential

Question 33

What are the interventionist policies (3)

Answer 33

- government spending on education and healthcare - Industrial policies- grants, tax breaks, and subsidies- incentivises investment- increase R&D, increase productivity - Infrastructure Spending- improved transport link, decrease cost of transport, encourage investment

Question 34

What do SSP solve

Answer 34

Solve structural problems that can’t be solved by increase in AD

Question 35

What are evaluation of free market oriented policy

Answer 35

Shifting from direct tax to indirect tax didn’t have large impact (didn’t increase labour supply)

Question 36

What are evaluation for interventionist policy

Answer 36

Budget deficit

Question 37

What are evaluation for SSPs

Answer 37

-time lag -in recession, it can’t tackle fundamental problems of lack of AD

Question 38

What are the macroeconomic aims

Answer 38

-economic growth 2.5% -unemployment 4% -inflation 2% -equal distribution of income and wealth -stable balance of payments

Question 39

What are the common policy conflicts

Answer 39

- economic growth and inflation - economic growth and inequality (wealth effect) - economic growth and balance of payments - unemployment and inflation

Question 40

Explain the Short Run Philips Curve

Answer 40

Trade off between inflation and unemployment Y: inflation rate X: Unemployment rate Lower AD, cyclical unemployment, decrease disposable income, decrease C Decrease cost push inflation, as surplus of labour, don’t need to set competitive wage to attract workers