2.6.2 Policy instruments

Question 1

the government tries to achieve its four objectives using a range of policies these are…

Answer 1

fiscal policy
monetary policy
supply-side policies.

Question 2

what is a contractionary policy

Answer 2

if the economy is growing too quickly during a boom, this will be used to reduce the level of economic activity and national income.

Question 3

what are expansionary policies

Answer 3

if there is a recession, or if the economy is not growing quick enough and/or unemployment is too high this will be used to stimulate economic activity.

Question 4

what are 3 contractionary policies

Answer 4

cuts in government expenditure
tax increase
higher interest rates

Question 5

what are expansionary policies?

Answer 5

lower interest rates
tax cuts
increased government expenditure

Question 6

what is fiscal policy

Answer 6

involves changes in the levels of taxation and/or government expenditure in order to influence the level of activity in the economy

Question 7

what is a public sector deficit

Answer 7

occurs when government spending exceeds to governments income and it must borrow to fund the difference

Question 8

what is monetary policy?

Answer 8

uses interest rates to vary the costs of borrowing and influence the level of aggregate demand. Changes in the Bank of England’s base rate will affect interest rates across the economy

Question 9

whats an injection

Answer 9

money being but into the circular flow

Question 10

what a leakage

Answer 10

money being removed from the circular flow

Question 11

what are supply-side policies

Answer 11

include all measures designed to increase the productive capacity of the economy by influencing aggregate supply. Some are based on long experience backed by economic arguments, others on political viewpoints.

Question 12

what are 5 supply side policies

Answer 12

Taxes - cuts in tax incentivise work

Benefits - cuts in benefits make living off benefits less attractive and decrease unemployment

Education/training - improves the skills and flexibility of workforce

grants and subsidies - can support development of desirable outcomes

privatisation - rests on the assumption that competition will lead to greater efficiency

Question 13

what is a floating exchange rate

Answer 13

the price of the currency is determined by market forces i.e. demand and supply. It behaves just like any good or service. The demand for and supply of the currency are created by trade and capital flows.