4.4 Macroeconomic policies and impact on firms/individuals

• Draw an individual demand curve and show what would happen to Q given an increase in demand

  As shown, an increase in demand leads to an increase in quantity, whilst maintaining price level "P1"

  
• how do prices affect the demand/supply curve

  Prices cause movements along the demand and supply curves

  Prices do not cause shifts in the demand and supply curves
• 3 reasons why the supply curve is upward sloping

  • if price increases, its more profitable for firms to supply the good
  • high prices encourage new firms to enter the market
  • larger output increases costs, which are passed onto consumers in form of higher prices
• components of aggregate demand (AD)

  Consumer spending (C)

  Investment (I)

  Government Spending (G)

  Exports - Imports (X-M)
• largest component of aggregate demand

  consumer spending
• disposable income


  income left over for consumers to spend once taxes are deducted
• how do low interest rates encourage more consumer spending

  low interest rates make it cheaper to borrow money and discourage saving.

  It also lowers the cost of variable rate mortgages, increasing disposable income
• only 2 things consumers can do with income


  save it or spend it
• how is business confidence and capital investment correlated


  as confidence increases, so does capital investment
• is fiscal policy demand side or supply side


  demand side
• when would the govt. initiate contractionary fiscal policy

  economic booms, to ease inflationary pressure and prevent periods of economic instability
• how would the exchange rate affect the current account deficit

  depreciation makes imports expensive and exports cheap, thus narrowing the deficit and boosting economic growth
• how could the govt. intervene to reduce the current account deficit

  adopting protectionist measures, whereby tariffs against imports and British firms are subsidised to improve their compeitiveness
• 4 factors affecting aggregate supply

  • cost of employment
  • cost of raw materials
  • government regulation
  • migration
• which way would the SRAS curve shift given an inc. in taxes


  shift to the left
• which way would the SRAS curve shift given a decrease in the cost of raw materials


  shift to the right
• what type of fiscal policies does the govt. implement when inflation is high

  deflationary fiscal policies
• 2 features of expansionary fiscal policy

  increase in expenditures and reduction in taxes
• define crowing out

  occurs when an increase in government spending reduces the resources available for the private sector to use
• will fiscal policies have an immediate impact on the economy

  no , there is a time lag
• 3 things that monetary policy involve

  • interest rates
  • money supply
  • exchange rates
• what is the base rate

  interest rate set by a central bank to loan money to commercial banks
• what is the positive wealth effect

  when people spend more because they feel richer
• describe how quantitative easing works

  central bank digitally creates new money, which it then uses to buy corporate and bank bonds, so that banks are more willing to loan money to consumers to stimulate demand in the economy
• why might changing the base rate have no effect on the economy

  banks may not choose to pass this base rate onto consumers in the form of higher interest rates
• what does the Phillips curve show

  inverse relationship between inflation rates and the rate of unemployment
• explain why inflation rises as unemployment falls

  as the economy grows, workers have more bargaining power as firms need more of them, so workers demand higher wages which increases the prices of goods and thus the overall inflation rate
• what is a positive output gap

  occurs when the actual level of output exceeds the potential level of output
• why does economic growth lead to a current account deficit

  British consumers have a high propensity to import, which eventually exceeds the level of exports during times of economic propensity
• aim of supply side policies

  improve the long run productive potential of the economy
• how are training and education beneficial to firms

  improves the productivity of the workforce
• benefit of privatisation


  firms now have a profit motive, and so will find wages to cut costs and improve productivity, which in turn increases output
• are supply side policies better at reducing structural or cyclical unemployment


  structural unemployment
• 2 examples of interventionist supply side policies

  • reforming the labour market
  • improving infrastructure
• graph representing a Keynesian version of a outward shift in LRAS


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• graph representing a classical version of an outward shift in LRAS


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