Government Policy Flashcards
What happens in the free market?
Markets clear (wages adjust)
What happens in the Keynesian?
Markets fail
Why do government use policies?
Achieve macroeconomic objectives.
What are used to control the economy?
Policy Instruments / Policy tools
What are demand side policies?
Occur where the government tries to influence aggregate demand.
What are the two main demand side policies?
Fiscal Policy (the treasury) and Monetary Policy (Bank of England)
How is Fiscal policy used?
Changes in government spending and taxation.
How is monetary policy used?
Changes in the money supply-interest rates
What are supply side policies?
Where the government tries to shift the LRAS curve to the right and increase the economy’s productive potential.
What happens when aggregate demand will rise with policy objectives?
Aggregate demand will increase, people have more disposable income so consumption goes up and government spending is a component of AD.
What will firms do in policy objectives?
Expand output and take on more staff (less unemployment)
What does higher demand then lead to?
Higher prices.
What is a sovereign debt problem?
Government debt.
How does monetary policy achieve objectives?
Uses monetary intrsuments.
What is the main monetary instrument?
Manipulating interest rates, other instruments include manipulation of money supply and exchange rates.
