4.4

    Cards (112)

    • Demand-side policies

      Policies designed to increase consumer demand, so that total production in the economy increases
    • Monetary policy

      Used by the government to control the money flow of the economy, done with interest rates and quantitative easing, conducted by the Bank of England which is independent from the government
    • Fiscal policy
      Uses government spending and revenues from taxation to influence AD, conducted by the government
    • Monetary policy instruments
      1. Interest rates
      2. Asset purchases to increase the money supply: Quantitative Easing (QE)
    • Interest rates
      The Monetary Policy Committee (MPC) alters interest rates to control the supply of money, used to help meet the government target of price stability, the bank controls the base rate which ultimately controls the interest rates across the economy
    • When interest rates are high
      The reward for saving is high and the cost of borrowing is higher, encourages consumers to save more and spend less, used during periods of high inflation
    • When interest rates are low

      The reward for saving is low and the cost of borrowing is low, consumers and firms can access credit cheaply, encourages spending and investment in the economy, usually used during periods of low inflation
    • Quantitative Easing (QE)

      Used by banks to help stimulate the economy when standard monetary policy is no longer effective, has inflationary effects since it increases the money supply and can reduce the value of the currency, used where inflation is low and it is not possible to lower interest rates further
    • Quantitative Easing (QE)

      The bank buys assets in the form of government bonds using the money they have created, this increases the amount of cash flowing in the financial system, encourages more lending to firms and individuals, increases investment and spending, can lead to higher inflation
    • If inflation gets high

      The Bank of England can reduce the supply of money in the economy by selling their assets, this reduces the amount of spending in the economy
    • Limitations of monetary policy

      • Banks might not pass the base rate onto consumers
      • Consumers might be unable to borrow because banks are unwilling to lend
      • Interest rates will be more effective at stimulating spending and investment when consumer and firm confidence is high
    • Fiscal policy instruments

      Government spending and taxation
    • Expansionary fiscal policy

      Aims to increase AD, governments increase spending or reduce taxes, leads to a worsening of the government budget deficit
    • Deflationary fiscal policy

      Aims to decrease AD, governments cut spending or raise taxes, leads to an improvement of the government budget deficit
    • Direct taxes

      Imposed on income and paid directly to the government from the tax payer, examples include income tax, corporation tax, NICs and inheritance tax
    • Indirect taxes
      Imposed on expenditure on goods and services, increase production costs for producers, increase market price and demand contracts, examples include VAT and fuel duty
    • Types of indirect taxes
      • Ad valorem taxes (percentages, such as VAT)
      • Specific taxes (set tax per unit, such as fuel duty)
    • Limitations of fiscal policy

      • Governments might have imperfect information about the economy, leading to inefficient spending
      • Significant time lag involved with employing fiscal policy
      • If the government borrows from the private sector, there are fewer funds available for the private sector, which could lead to crowding out
      • The bigger the size of the multiplier, the bigger the effect on AD and the more effective the policy
      • If interest rates are high, fiscal policy might not be effective for increasing demand
      • If the government spends too much, there could be difficulties paying back the debt, which could make it difficult to borrow in the future
    • As economic growth increases

      Unemployment falls due to more jobs being created, but this causes wages to increase, leading to more consumer spending and an increase in the average price level
    • A growing economy

      Is likely to experience inflationary pressures on the average price level, especially when there is a positive output gap and AD increases faster than AS
    • Negative output gap

      Actual level of output is less than the potential level of output, puts downward pressure on inflation, indicates unemployment of resources and spare capacity in the economy
    • Positive output gap

      Actual level of output is greater than the potential level of output, puts upwards pressure on inflation, can be due to resources being used beyond normal capacity
    • During periods of economic growth

      Consumers have high levels of spending, in the UK consumers have a high marginal propensity to import, leading to a worsening of the current account deficit
    • Reducing a budget deficit

      Requires less expenditure and more tax revenue, leading to a fall in AD and less economic growth
    • High rates of economic growth

      Are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources, due to more manufacturing and higher carbon dioxide emissions
    • Potential policy conflicts and trade-offs facing policy-makers
      • Unemployment vs inflation
      • Economic growth vs inflation
      • Economic growth vs the current account
      • Economic growth vs the government budget deficit
      • Economic growth vs the environment
    • Other problems the government might face
      • Reducing the size of the government deficit is politically unpopular
      • Some policies take a long time to show an effect
      • Some events are beyond the control of the government, such as the financial crisis and global interest rates
    • When governments employ a policy, there could be unintended consequences where consumers react in unexpected ways, undermining the policy and making it expensive to implement
    • Aggregate demand

      The total demand in the economy. It measures spending on goods and services by consumers, firms, the government and overseas consumers and firms.
    • Components of aggregate demand

      • Consumer spending
      • Capital investment
      • Government spending
      • Exports minus imports
    • Consumer spending

      The largest component of aggregate demand, making up just over 60% of GDP. It is the amount consumers spend on goods and services.
    • Disposable income

      The amount of income consumers have left over after taxes and social security charges have been removed. It is what consumers can choose to spend.
    • Influences on consumer spending

      • Interest rates
      • Consumer confidence
    • Interest rates

      If the Monetary Policy Committee lowers interest rates, it is cheaper to borrow and reduces the incentive to save, so spending and investment increase.
    • Consumer confidence

      If consumers and firms have higher confidence levels, they invest and spend more, because they feel as though they will get a higher return on them. This is affected by anticipated income and inflation.
    • Capital investment

      Accounts for around 15-20% of GDP in the UK per annum, and about ¾ of this comes from private sector firms. The other ¼ is spent by the government.
    • Influences on investment

      • The rate of economic growth
      • Business expectations and confidence
      • Demand for exports
      • Interest rates
      • Access to credit
      • The influence of government and regulations
    • Rate of economic growth
      If growth is high, firms will be making more revenue due to higher rates of consumer spending. This means they have more profits available to invest.
    • Business expectations and confidence

      If firms expect a high rate of return, they will invest more. Firms need to be certain about the future, otherwise they will postpone their investments.
    • Aggregate demand

      The total demand in the economy. It measures spending on goods and services by consumers, firms, the government and overseas consumers and firms.