2.6.2

• What are demand-side policies designed to do?

  • Increase consumer demand
  • Increase total production in the economy
• What is the distinction between monetary and fiscal policy?

  Monetary policy controls money flow; fiscal policy uses spending and taxes
• Who conducts monetary policy in the UK?

  The Bank of England
• What instruments does monetary policy use?

  Interest rates and quantitative easing
• What does the Monetary Policy Committee (MPC) do?

  Alters interest rates to control money supply
• How does a reduction in the base rate affect aggregate demand (AD)?

  It leads to an increase in AD

  
• What are the transmission mechanisms of lower interest rates?

  • Increased consumption and investment
  • Higher asset prices due to lower borrowing
  • Reduced attractiveness of saving
  • Weaker pound leading to increased net trade
• What is Quantitative Easing (QE)?

  A method to stimulate the economy by increasing money supply
• When is QE typically used?

  When inflation is low and interest rates can't be lowered
• What happens if inflation gets high after QE?

  The Bank can reduce the money supply by selling assets
• What are the limitations of monetary policy?

  • Banks may not pass on base rate changes
  • Consumers may be unable to borrow
  • Effectiveness depends on confidence levels
• What is the aim of fiscal policy?

  To stimulate economic growth and stabilize the economy
• What is the largest source of tax revenue in the UK?

  Income tax
• What does expansionary fiscal policy aim to do?

  Increase aggregate demand (AD)
• What is a budget deficit?

  When expenditure exceeds tax receipts
• What are indirect taxes?

  Taxes imposed on expenditure that increase production costs
• When did the Great Depression begin?

  1929
• What was the unemployment rate during the Great Depression?

  Increased to 25%
• What did Keynesian economists emphasize during the Great Depression?

  The use of demand-side policies
• What did the government do during the Global Financial Crisis?

  Cut public sector wages and raised income tax
• What was one response to the Global Financial Crisis in the USA?

  Roosevelt's New Deal used public sector investment
• What was a significant cause of the Great Depression?

  A huge loss in consumer and business confidence
• What was a consequence of the 2008 financial crisis?

  Decline in world GDP
• What was a significant outcome of Roosevelt's New Deal?

  Increased aggregate demand and recovery
• What was the state of the banking system during the sustainable boom?

  It was unstable; banks were allowed to crash
• What economic policy did the USA adopt during the boom?

  Protectionism
• What was the UK's commitment regarding its currency?

  It was fixed to gold and overvalued
• What was Roosevelt's New Deal aimed at achieving?

  Increase AD and bring about recovery
• What do some argue about the effectiveness of the New Deal?

  Not enough spending was undertaken
• What was the role of subprime mortgages in the crisis?

  They backed risky bank loans and securities
• What happened to homeowners after house prices crashed in 2006?

  Many defaulted on their mortgages
• What assistance did banks require after losing funds?

  Government bailouts
• What did both governments do to stabilize the banking system?

  Nationalised banks and guaranteed savers' money
• What VAT change occurred in the UK during the crisis?

  Cut from 17.5% to 15%
• Why did the USA recover faster than the UK?

  Used more expansionary fiscal policy