Government policies

Question 1

Contractionary v expansionary

Answer 1

Expansionary policies focus on economic growth
- lowering interest rates or increasing government spending

Contractionary policies slow down an economy
- increasing interest rates and reducing government spending

Question 2

Fiscal policies

Answer 2

Sets tax rates and amount of government spending

Raising tax
- reduces spending in an economy
- no business expansion as lower sales volume

Types of tax
- Personal (income) tax; if reduced then people have more income, increases demand for luxury goods
- Corporation (business) tax; if reduced then firms retain more profit, allows for investment
- spending (VAT); if reduced then businesses can lower their prices, demand rises if price elastic

Increasing tax
- focus on impacts on demand
- most long-term debt has a fixed interest rate so won’t change costs u less they’re using an overdraft

Government spending
- pay for infrastructure and education, specific industries receive subsidies (such as financial aid/ lower tax) , specific areas have better infrastructure

Question 3

Monetary policies

Answer 3

Set by the Bank of England

Affect interest rates

Consumers; reduced rates means there’s less incentive to save and it’s cheap to pay mortgages, increases spending and income

Businesses; reduced rates mean expansion and investment is cheap, helpful for businesses with high gearing

Question 4

Interest rates affecting exports

Answer 4

High interest rates
- savers earn more (higher return)

Impact
- attracts foreign investors (earn more compared to other countries)
- increases demand for our currency

High demand for currency
- increases exchange rate (stronger £)

Impact on exports
- more expensive, charge highet foreign price to have same £’s)