2.6.2: Demand-side policies

• Demand-side policies: Policies aiming to manipulate aggregate demand to reach macroeconomic objectives
• Monetary policy: Use of interest rates and the money supply to change AD. It is controlled by the bank of England
• Fiscal policy: Using tax, government spending and borrowing to influence the economy
• Direct tax: A tax on income or wealth
• Indirect tax: A tax on expenditure
• Progressive tax: Tax that takes higher proportion of income from those on higher incomes
• Regressive tax: Tax that takes a lower or equal proportion of income from those on higher incomes
• Public spending: Spending by the government to influence aggregate demand
• Current spending: Spending on costs of running public services
• Fiscal deficit: Amount the government borrows to make up the gap between its income and spending
• National debt: Accumulation of fiscal deficits which have not been repaid
• If there is a budget surplus, the government can pay back some of its debt
• Central bank: The monetary authority responsible for maintaining financial stability
• The BoE will consider many things when making interest rates, such as inflation forecasts, growth of real GDP, confidence, asset prices and wage growth
• Quantitative easing: When the government purchases assets, usually government bonds, from banks in exchange for cash
• Quantitative easing: When the Bank of England purchases assets, usually government bonds, from banks in exchange for money
• Quantitative easing increases the supply of money, which stimulates consumption and investment, increasing AD
• Expansionary policy: Policy designed to increase AD
• Contractionary policy: Policy designed to decrease AD
• There is often a time lag between fiscal policy and changes in the economy. This is often about around 18 months
• Problem with Quantitative easing: Could cause uncontrollable inflation if overused
• Problem with Quantitative easing: Has little effect if consumer confidence is low
• Problem with Quantitative easing: Concerns that many economies are too dependent on it
• Problem with interest rates: High interest rates decrease investment and therefore LRAS over time
• Problem with Fiscal policy: Cutting government spending has effects on the supply side, as it will decrease LRAS
• Problem with Fiscal policy: Increasing taxes lead to greater income inequality
• Problem with Fiscal policy: Impact of Fiscal policy is dependent on the size of the multiplier
• Problem with demand side policies: Expansionary policies lead to inflation, and deflationary policies lead to unemployment
• Monetary policies are effective at increasing AD without spending
• Fiscal policies are useful at targeting specific groups, and reducing poverty and inequality