Macro 1.9

Question 1

What is a policy instrument?

Answer 1

A tool or set of tools used to try achieve a policy objective.

Question 2

What is the Bank of England (BofE)?

Answer 2

The central bank in the UK economy which is in charge of monetary policy.

Question 3

What does the central bank control?

Answer 3

It controls the banking system and implements monetary policy on behalf of the government.

Question 4

What is money?

Answer 4

An asset that can be used as a medium of exchange, it is used to buy things.

Question 5

What is the inflation rate target?

Answer 5

The CPI inflation rate target set by the government for the Bank of England to try to achieve.

Question 6

What is the Monetary policy Committee (MPC)?

Answer 6

Nine economists, chaired by the governor of the Bank of England. They meet once a month to set Bank Rate, the BofE’s key interest rate, and also decide whether other aspects of monetary policy need changing.

Question 7

What is the Bank Rate?

Answer 7

The rate of interest the BofE pays to commercial banks on their deposits held at the BofE.

Question 8

What does liquidity do?

Answer 8

Measures the ease with which assets can be turned into cash quickly without a loss in value.
Note: Cash is the most liquid of all assets

Question 9

What is the money supply?

Answer 9

The stock of money in the economy, made up of cash and bank deposits.

Question 10

What does a contractionary monetary policy do?

Answer 10

Uses higher interest rates to decrease aggregate demand, shift the AD curve inwards (to the left).

Question 11

What is exchange rate?

Answer 11

The price of a currency (e.g. the pound), measured in terms of another currency such as the US dollar of the euro.

Question 12

What does a expansionary monetary policy do?

Answer 12

Uses lower interest rates to increase aggregate demand, shift the AD curve outwards (to the right).

Question 13

What is a fiscal policy?

Answer 13

The use of taxation, public spending and government’s budgetary position to achieve to government’s policy objective.

Question 14

When does budget deficit occur?

Answer 14

When government spending exceeds government revenue (G>T).

Question 15

When does a balance budget occur?

Answer 15

When government spending equals government revenue (G=T).

Question 16

When does a budget surplus occur?

Answer 16

When government spending is less than government revenue (G<T).

Question 17

What is public sector borrowing?

Answer 17

Borrowing by the government and other parts of the public sector to finance a budget deficit.

Question 18

What does demand-side fiscal policy do?

Answer 18

To increase or decrease the level of aggregate demand through changes in government spending, taxation and the balance budget.

Question 19

What is deficit financing?

Answer 19

Deliberately running a budget deficit and borrowing to finance a deficit.

Question 20

What does expansionary fiscal policy do?

Answer 20

Uses fiscal policy to increase aggregate demand.

Question 21

What does contractionary fiscal policy do?

Answer 21

Uses fiscal policy to decrease aggregate demand.

Question 22

What is a supply side policy?

Answer 22

Policies that seek to improve the long run productive potential of the economy ( a shift outwards in the LRAS)

Question 23

What is the purpose of a supply side policy?

Answer 23

Improving factors of production (LLEC) to improve the quantity or quality of production.

Question 24

What are free market supply side policies?

Answer 24

Policies that focus on reducing the size of the state/government and boosting the role of market forces in allocating scarce resources.
Examples: Cutting Gov spending, Lower business and income tax and reducing red tapes/barriers to enter market.

Question 25

What are government intervention supply side policies?

Answer 25

Increasing state power over the market to have positive long-term effects of the supply-side performance.
Examples: State investment, higher taxes on wealth, increased import control, management of exchange rate to improve competitiveness and nationalisation of key industries.