Theme 4 - Demand-side policies

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  • Created by: becky.65
  • Created on: 06-03-18 11:25
What do demand side policies directly affect?
The level of aggregate demand
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How can demand side policies stimulate the economy?
It can stimulate business activity and foster economic growth
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How can demand side policies contract the economy?
AD can be reduced so that the economy can grow more slowly by reducing inflation and skill shortages
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Who is fiscal policy determined by?
The government
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What is fiscal policy?
Changes to taxation or government expenditure
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How can the government stimulate the economy with fiscal policy?
With tax cuts and/or increased expenditure, or reduce inflation risks by raising taxes and cutting expenditure to increase AD
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How can fiscal policy be used to address social problems?
It can help fund new research and technology, to build infrastructure and reduce inequality and improve health care and education
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Who is monetary policy determined by?
The Monetary Policy Committee, which is part of the Bank of England
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What is monetary policy?
The changing of interest rates to keep inflation rates close to the target area
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What is quantitative easing?
It is an alternative monetary policy that allows the Bank of England to buy bonds from the banks, so that they can provide more finance for investment
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Why is quantitative easing used?
To stimulate the economy when interest rates are very low
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What is the problem with quantitative easing?
It will not increase investment if uncertainty causes businesses to cut back on investment
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What is the impact of expansionary policies of AD?
People have higher disposable incomes and spend more, increasing AD and encouraging businesses to produce more. Increased expenditure will improve social welfare and the workforce, increased investment will create jobs. Faster economic growth
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What is the impact of contractionary policies of AD?
Employees will be made redundant, disposable income will fall, AD and profits will be reduced, investment will look too risky, exporters will sell more abroad due to reduced demand, government expenditure cuts will reduce employment
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What is one way to maintain stable, sustainable growth?
To create a policy package which includes fiscal and monetary policies that do not lead to over-full employment and inflation and in combination with supply-side policies it will increase productive capacity of the economy
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How can inflation be controlled?
By reducing aggregate demand, quickly through fiscal policy or steadily through monetary policy
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How can inflation be kept steady in the long-run?
By supply-side policies to increase capacity and create strong competition to keep prices down and expand production capacity
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How can unemployment be cut?
By increasing aggregate demand by creating incentives to work and increasing profits and encouraging companies to expand
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What is the problem with economic policies?
Time lags
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What are the strengths of demand-side policies?
Tax cuts can be implemented quickly, it can stimulate the economy, contractionary policies can prevent overheating and progressive taxes with welfare benefits act as automatic stabilisers
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What are the weaknesses of demand-side policies?
It is difficult to stimulate the economy or slow it down with the right amount of policy, time lags make it hard to predict outcomes, cutting taxes reduces government income, if unemployment is structural demand-side policies will not help
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What are the potential policy conflicts and trade-offs facing policymakers when applying policies?
The four main government objectives are often incompatible with each other, there are policy conflicts, attempts to resolve one problem create problems elsewhere, thus there are always trade-offs
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Other cards in this set

Card 2

Front

How can demand side policies stimulate the economy?

Back

It can stimulate business activity and foster economic growth

Card 3

Front

How can demand side policies contract the economy?

Back

Preview of the front of card 3

Card 4

Front

Who is fiscal policy determined by?

Back

Preview of the front of card 4

Card 5

Front

What is fiscal policy?

Back

Preview of the front of card 5
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