Demand Side Policies Summary sheet

• What is the definition of macroeconomic policy?

  Actions taken by government to achieve objectives
• What are the two major types of economic policies that impact Aggregate Demand?

  • Fiscal Policy
  • Monetary Policy
• How does Fiscal Policy influence the economy?

  Through tax rates and government spending
• What are the two major tools of Monetary Policy?

  Interest rate and money supply
• What are the two types of Fiscal Policies?

  • Expansionary Fiscal Policy
  • Contractionary Fiscal Policy
• What is Expansionary Fiscal Policy?

  Decreases in taxes and increases in spending
• What is Contractionary Fiscal Policy?

  Increases in taxes and decreases in spending
• What is Expansionary Monetary Policy?

  Decreases in interest rates and increases in money supply
• What is Contractionary Monetary Policy?

  Increases in interest rates and decreases in money supply
• When is Expansionary Fiscal Policy implemented?

  • During economic slowdown or recession
  • Reduces tax rates
  • Increases government spending
• When is Contractionary Fiscal Policy implemented?

  • During economic boom
  • Increases tax rates
  • Reduces government spending
• What are the two forms of Fiscal Policy?

  • Expansionary Fiscal Policy
  • Contractionary Fiscal Policy
• What is the purpose of Fiscal Policy?

  To intervene during market failures
• What are the tools used in Fiscal Policy?

  • Government Spending
  • Taxes
• What are the objectives of Fiscal Policy?

  • Economic Growth
  • Reduce Unemployment
  • Slowdown Inflation
  • Redistribution of Income
• How does an increase in government spending affect Aggregate Demand?

  It increases Aggregate Demand
• What happens to Aggregate Demand during Contractionary Fiscal Policy?

  It decreases Aggregate Demand
• What is discretionary fiscal policy?

  • Deliberate changes in government spending and taxation
• What are automatic stabilisers?

  • Government spending and taxation that change automatically
• How does government spending affect Aggregate Demand?

  It positively affects Aggregate Demand
• What is the multiplier effect?

  Initial increase in spending causes greater increase
• What are the categories of government spending?

  Current Spending, Capital Spending, Transfer Payments
• What is Current Spending?

  • Expenditures for current use
  • Short-term in nature
• What is Capital Spending?

  • Spending on goods for production
  • Long-term investments
• What are Transfer Payments?

  • Money transactions without goods/services provision
  • Examples: pensions, benefits
• What is the purpose of government spending?

  To influence the economy and stabilize it
• What is the principle of equity in taxation?

  Taxation should be fair and just
• What is the principle of economy in taxation?

  Tax system should be cost-effective
• What is the principle of transparency in taxation?

  Taxpayer should know payment details
• What is the principle of convenience in taxation?

  Tax payment should be easy for taxpayers
• What is the principle of productivity in taxation?

  Tax system should yield sufficient revenue
• What is the principle of elasticity in taxation?

  Tax system should adapt to economic changes
• What is the principle of flexibility in taxation?

  Tax structure should be easily revised
• What is the principle of simplicity in taxation?

  Tax system should be easy to understand
• What is the principle of diversity in taxation?

  Tax should be collected from various sources
• What is a progressive tax?

  Tax rate increases with income level
• What is a proportional tax?

  Tax rate remains constant regardless of income
• What is a regressive tax?

  Tax rate decreases as income increases
• What is a lump sum tax?

  Fixed tax amount regardless of income
• What is the marginal rate of tax (MRT)?

  Change in tax as a percentage of income change