PAPER 3

Question 1

-What are demand side policies?

Answer 1

-Demand side policies are aimed at manipulating consumer demand. Expansionary policies increase consumer demand and contractionary decrease demand.

Question 2

-What are the two types of demand side policies?

Answer 2

• Monetary policies is using exchange, rates interest rates and money supply.
• Fiscal policy is when the government uses spending and borrowing to alter AD.

Question 3

-What are the 4 mechanisms of a rise in interest rates?

Answer 3

• The rise in interest rate will increase the cost of borrowing for firms and consumers. This will decrease AD through consumption and investment.
• As less people are borrowing and more people are saving, there is less demand for stocks which decreases the costs of them which causes a negative wealth affect.
• People will become less confident about borrowing and spending if interest rates. The fall in consumer and business demand leads to a fall in consumption and investment.
• Foreign individuals will put money in UK banks and this will increase the demand for the GPB.

Question 4

Who is monetary policy decided by?

Answer 4

• The MPC 9 members and they want to keep inflation

+-1 2%

Question 5

What are the problems with changing interest rates to control demand?

Answer 5

• Exchange rate may be impacted that it causes the price of imports to rise or fall.
• Changes in interest rates may take 2 years to have impact
• Interest rates are so low they can’t be decreased any further to stimulate demand.
• High interest rates over a long period of time will decrease LRAS.

Question 6

How does quantitive easing work?

Answer 6

• Government digitally creates money and purchases government bonds.
• Government bond has a fixed coupon
• As the demand for bond increases the price of them rises
• This decreases the % yield is fixed over the life of the bond.
• This causes long run interest rates to fall

-Bonds are also purchased from financial institutions with money created by the bank of England so they can lend more.

Question 7

What are the negatives of quantitative easing?

Answer 7

• It is very risky and if not controlled properly can cause hyper inflation.
• No guarantee that asset prices rising will cause AD to increase when confidence is low.
• Arguments that economies are too dependent on QE especially eurozone.