Macro 3.5.Policies pt 2 Flashcards
(17 cards)
Demand-side policies definition?
Policies used to control the business cycle mainly affect AD, managed by the govt or central bank.
Types of demand-side policies?
Fiscal and Monetary policies
Expansionary fiscal policy definition and forms?
A policy used to expand the circular flow of income in the economy- to bring it out of recession, although worsening the budget deficit
Forms:
Lower income tax
Higher benefits
Decreasing Corporation tax
Decreased VAT
Raised infrastructure spending
More healthcare and educational spending
Contractionary fiscal policy?
A policy used to contract the circular flow of income in the economy- to improve the budget deficit.
Forms:
Higher income tax
Lower benefits
Increasing Corporation tax
Increased VAT
Lowered infrastructure spending
Less healthcare and educational spending
Monetary Policy definition?
A demand-side policy controlled by the central bank of a country, that affects AD by manipulating base interest rates and the supply of a currency in the economy.
What is the base interest rate and how does it affect the economy?
BIR= Interest rate on borrowing from the central bank
Highstreet banks tend to follow trends in the BIR, which will affect all consumers and producers in the economy, regarding mortgages, savings, investments and exports
Expansionary monetary policy?
When the base interest rate is decreased, raising consumption and causing demand-pull inflation.
Contractionary monetary policy?
When the base interest rate is raised to reduce AD and bring the inflation rate back down to the target.
Quantitative easing?
When central banks create new money electronically and use it to buy back govt bonds or purchase other financial assets from high-street banks, to increase the money supply.
Results in demand-pull inflation, as consumers can take out more loans from the richer banks
Quantity theory of money (Fischer’s equation)?
Money supply X Velocity of money
=
Price Level X Quantity
Where both sides represent nominal GDP
How does Fischer’s equation support quantitative easing?
Monetarists believe in SR, V and Q are constant meaning money supply is the key to inflation.
Supply-side policies definition?
Policies used to control the business cycle, mainly affect AS, managed by the govt.
Two types of of supply-side policies?
Interventionist policy- when the govt increases intervention in the economy
Market-based policy- when the govt decreases its intervention in the economy
Both intend to cause an outward shift SRAS
Various forms of supply-side policies?
Changing infrastructure spending
Changing Corporation tax
Changing education and healthcare spending
Changing the national minimum wage
Changing the privatization of markets
Changing benefits
Economic shock?
Unpredictable events that have macroeconomic consequences, impaction economic growth, inflation rate, or unemployment levels.
Demand-Side shock?
A shock that involves a sudden change in the levels of consumer spending or business investment
Supply-Side shock?
A shock that can affect a country’s long-run productive potential.
