Demand-side policies

• What is monetary policy?

  Policies which adress interest rates and the supply of money in circulation, and which are managed by a central bank
• What are interest rates?

  The cost of borrowing money or the return received for saving
• How are interest rates used to decrease AD?

  If the rate of inflation is above its target level than the base interest rate will be decreased
• How are interest rates used to increase AD?

  If the rate of inflation is below its target level than the base interest rate will be increased
• What is quantitative easing?

  A form of monetary policy where a central bank buys government bonds in order to increase the money supply and stimulate the economy
• When is quantitative easing used?

  In an economic crisis, when interest rates alone cannot stimulate AD
• What is fiscal policy?

  Policies which adress government spending and the use of taxation, and which are managed by legislation
• What is government expenditure?

  Spending by the government on public goods, services, and programs
• What are direct taxes?

  Taxes on income
• What are indirect taxes?

  Taxes on spending
• How is fiscal policy used to decrease AD?

  The government would decrease expenditure and/or increase taxes
• How is fiscal policy used to increase AD?

  The government would increase expenditure and/or decrease taxes
• What is budget deficit?

  When the government spends more than it receives in taxation, leading to an increase in AD
• What is budget surplus?

  When the government spends less than it receives in taxation, leading to a decrease in AD
• What are the main jobs of the Monetary Policy Committee?

  To set the base interest rate, and to use monetary tools to meet the government's inflation target of 2%
• What are the two main advantages of demand-side policies?

  They can control demand-pull inflation, and if the multiplier is large, they can increase economic growth
• What are the two main disadvantages of demand-side policies?

  Stimulating AD leads to a larger budget deficit and contributes to national debt, and the multiplier might be low so that they have no effect