Macroeconomic Policies Flashcards Preview

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Flashcards in Macroeconomic Policies Deck (15)
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1

Demand-Side Policies

Fiscal policy and Monetary Policy

2

Supply-Side Policies

Any measures that aim to increase quantity and quantity of factors of production. Eg. investment and incentives

3

Fiscal Policy

Changes in government spending and taxation

4

Monetary Policy

Changes in interest rates, money supply and QE (quantitative easing)

5

QE (Quantitative Easing)

Central bank electronically creates money and uses it to buy bonds, aiming to increase money supply and increase liquidity in financial markets.

6

Investment (supply-side policy)

Includes:
- Education / Training (more knowledge more productive)
- Healthcare (Longer life expectancy more hours of work)
- Infrastructure (More motorways, airports and therefore lower costs)

7

Incentives (supply-side policy)

Includes:
- Decrease income taxes (people are awarded more, so have incentive to work harder and longer)
- Lower corporation taxes (people invest more)

8

Contractionary Fiscal Policy

To Reduce Inflation. Increase in taxes, decrease in government spending. This leads to lower government spending, consumption, investment, and lower Aggregate Demand

9

Contractionary Monetary Policy

To Reduce Inflation. Increase in interest rates (currency appreciates because there is more demand for saving, so more people buy that currency), decrease in money supply. This leads to lower consumption, investment, net exports and lower Aggregate Demand

10

Expansionary Fiscal Policy

To Address Deflation. Decrease in taxes, increase in government spending. This leads to increase in government spending, consumption, investment, and higher Aggregate Demand

11

Expansionary Monetary Policy

To Address Deflation. Decrease in interest rates (currency depreciates because there is less demand for saving, so less people buy that currency), increase in money supply. This leads to higher consumption, investment, net exports and higher Aggregate Demand

12

Disadvantages of fiscal policy

(short & long term effect)
- increase in income tax, workers negotiate for higher wages, cost-push inflation
- workers might also work less, disincentive effect, lower productivity, lower AS
**resolve short term problem- but get long term problem
- increase corporation tax, less profits, invest less, damage long term growth

- most effective when economy is at full capacity

13

Disadvantages of monetary policy

- consumer/business might still have high confidence, spending + investment carry on to be high
- increase interest rate, appreciation of currency, uncompetitive exports, worsen current account position

**not effective if demand-pull is caused by too much G

14

Disadvantages of supply-side policy

- takes time
- outcome uncertain

15

Any short-term solution dealing with cost-push?

Raise exchange rate (if using fixed exchange rate system). Currency appreciate, imports cheaper, reduce cost-push inflation, AS shifts rightward