2.6.2

Question 1

Demand- side policies

Answer 1

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

Question 2

Monetary policies

Answer 2

Used by the government to control the money flow of the economy
Done with interest rates and quantitative easing

Question 3

Fiscal policy

Answer 3

Uses government spending and revenues from taxation to influence AD
Conducted by the government

Question 4

Monetary policy instruments

Answer 4

Interest rates
Asset purchases to increase the money supply(quantitative easing)

Question 5

Limitations of monetary policy

Answer 5

• banks might not pass the base rate onto consumers, which means that even if the central bank changes the interest rate, it might not have the intended effect
• even if the cost of borrowing is low, consumers might be unable to borrow because banks are unwilling to lend. After 2008 financial crisis, banks became more risk averse
• interest rates will be more effective at stimulating spending and investment when consumer and firm confidence is high

Question 6

Fiscal government instruments

Answer 6

• government spending and taxation
• expansionary fiscal policy
• deflationary fiscal policy

Question 7

Budget deficit

Question 8

Budget surplus

Answer 8

Tax receipts exceed expenditure

Question 9

Direct taxes

Answer 9

Imposed on income and are paid directly to the government from the tax payer

Question 10

Indirect taxes

Answer 10

Imposed on expenditure on goods and services, and they increase productions costs for producers

Question 11

Limitations of fiscal policy

Answer 11

• governments might have imperfect information about the economy
• significant time lag involved with employing fiscal policy
• if the government borrows money