policy instruments

Question 1

what are the 3 policies

Answer 1

fiscal
monetary
supply side

Question 2

how does an increase in national income occur

Answer 2

output expands
GDP grows faster
unemployment falls

Question 3

how does a decrease in national income occur

Answer 3

output decreases
GDP growths slows
inflation is reduced

Question 4

contractionary policies

Answer 4

used to reduce the level of economic activity and national income
this will also slow down the demand for imports
used when the economy is growing too quick and inflationary pressure is building up during a boom
will be higher interest, tax increase and cuts in gov expenditure at this time

Question 5

expansionary policy

Answer 5

used to stimulate the level of economic activity raise nation income stimulate growth and reduce unemployment
used when there’s a recession an economy isn’t growing quick enough
will be lower interest rates, tax cuts and increased gov spending at this time

Question 6

what is fiscal policy

Answer 6

involves changes in the level 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 gov spending exceeds the government’s income and it must borrow to fund the difference

Question 8

how does expansionary fiscal policy work to affect AD

Answer 8

1. taxation is reduced and/ or gov expenditure is increases
2. less tax is paid more disposable
3. if gov expenditure(G) is increased, employment will rise and more income is created
4. rise in consumption (C)
5. more demand so businesses respond by increasing output
6. businesses have more workers, fall in unemployment
7. AD has increased and economy has grown

Question 9

how does contractionary fiscal policy work to affect AD

Answer 9

1. taxation is increased and/ or gov expenditure is reduced
2. more tax paid less disposable
3. if gov expenditure (G) is reduced, employment will fall and incomes fall
4. fall in consumption(C)
5. less demand for goods and services so businesses decrease output
6. businesses will reduce workforce so increased unemployment
7. AD has decreased and less activity in the economy

Question 10

what is monetary policy

Answer 10

uses interest rates to vary the cost of borrowing and influence the level of AD
changes in the bank of england’s base rate will affect interest rates across the economy

Question 11

base rate

Answer 11

it influences all the interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers
it may also affect the price of financial assets such as bonds and shares and the exchange rate
reducing or increasing interest rates affects spending in the economy

Question 12

how does monetary policy work

Answer 12

interest rates are the price of money and if they increase:
consumers have to pay more to take out loads and use credit cards so they reduce consumption
those with mortgages find their monthly repayment increasing and also reduce consumption
businesses have to pay more to obtain finance so reduce the level of investment

Question 13

how does expansionary monetary policy work to affect AD

Answer 13

1. base rate is reduced
2. other interest rates in the economy follow suit
3. the cost of borrowing for consumers and businesses falls
4. there’s a rise in consumption (C) and in investment (I)
5. more goods and services are consumed meaning that businesses respond by increasing output
6. businesses are likely to take on more workers so unemployment falls
7. AD has increased and the economy has grown

Question 14

how does contractionary monetary policy work to affect AD

Answer 14

1. base rate is increased
2. other interest rates in the economy follow suit
3. the cost of borrowing for consumers and businesses increase
4. there’s a fall in consumption (C) and in investment (I)
5. fewer goods and services are consumed meaning that businesses reduce output
6. businesses do this to reduce the workforce so unemployment rises
7. AD has decreased and the economy has slowed down

Question 15

what is a supply side policy

Answer 15

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
they affect AS not AD

Question 17

example of supply side policies

Answer 17

improvements to education and training
developing a flexible labour force
reducing structural unemployment
making markets more competitive
encouraging infrastructure development

Question 18

what can supply side policies help

Answer 18

help reduce inflationary pressures
if AS is growing, then AD can be expanded without causing the excess demand that leads to inflation

Question 19

supply side- taxes

Answer 19

cuts in taxes are thought to increase the incentive to work, though there is little hard evidence of this
tax credits provide an incentive to work

Question 20

affexts of benefits to supply side

Answer 20

cuts in benefits make living off benefits less attractive and can decrease unemployment

Question 21

affects of training and education supply side

Answer 21

improves skills and flexibility of the labour force
can reduce the occupational immobility of labour and help maintain the competitiveness of the economy

Question 22

affects of grants an subsidies supply side

Answer 22

can support development of desirable outcomes
e.g by encouraging sustainable and environmentally friendly production or energy generation

Question 23

what is privatisation

Answer 23

it’s a supply side policy resting on the assumption that competition will lead to greater efficiency
outcomes have been varied

Question 24

exchange rate policy

Answer 24

with a floating exchange rate the price of the currency is determined by market forces e.g 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

Question 25

how do exchange rates affect the economy

Answer 25

changes can alter prices of exports and imports higher interest rates tend to make the pound appreciate bcs investment in sterling assets becomes more attractive compared to other currencies this increases demand for pounds