Economics Unit 2: Monetary, Fiscal and Supply-Side Policies

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  • Unit 2: Policies
    • Fiscal
      • The policy of the government regarding tax and government expenditure
      • Used to influence AD and AS
      • Taxation
        • Taxes that may be manipulated include: Income tax, VAT, NI contributions and excise duties
      • 5 Types of Fiscal Policy
        • Contractionary Fiscal Policy: Increasing levels of tax revenue relative to gov spending, appropriate during a boom in econ activity
        • Demand-Side Fiscal Policy: Changes in the level or structure of gov spending or taxation aimed at influencing AD
        • Discretionary Fiscal Policy: The deliberate manipulation of gov spendning and tax to influence the economy
        • Expansionary Fiscal Policy: Increasing levels of gov spending relative to tax revenue, thus stimulating AD during a downturn in econ activity
        • Supply-Side Fiscal Policy: Changes in the level or structure of gov spending and taxation designed to improve the supply side of the econ
          • Entrepreneurship
          • Capital Spending
          • Research and Development
          • Improvement in Human Capital
          • Labour Market incentives
      • Gov Spending
        • Balanced Budget is where gov receipts equal gov spending in a financial year
          • Budget Surplus is where gov receipts exceed gov spending
          • Budget Deficit is where gov spending exceeds gov receipts
    • Supply-Side
      • A range of measures designed to increase aggregate supply and hence the potential putput of the economy, though many improvement may come from the private sector
      • Trade union reforms
        • Trade Unions restrict the supply of workers which increases wages
          • This increases costs, reduces efficiency and international competiveness
            • Therefore reducing the power of trade unions can combat this
      • Income Tax Reform
        • Lower rates of Income Tax provides a short-term boost to AD, as well improving incentives work work
      • Education and Training
        • Government provision of training can help tackle skill shortages, leading to a more productive, mobile and flexible work force
          • The introduction of National Curriculum and frameworks, ensure overall education standards are improved
      • Labour Market
        • Improving the quality and quantity of the supply of labour
        • Ensuring that the labour market is more flexible, reducing structural unemployment
      • Toughening Competition
        • Greater competition forces firms to become more efficient, thus reducing costs
        • Stopping abuses of dominant market positions
      • Encouraging Entrepreneurship
        • Small businesses add to national output, employ people and are innovative
          • Loan guarantees, advice and assistance to new businesses will encourage entrepreneur
      • Privatisation
        • Privately owned firms have more incentives to be efficient and competitive
    • Monetary
      • Controls the rate of interest
        • Monetary Policy Committee (MPC)
          • Target of 2% per annum
        • The cost of borrowing or the reward for saving
          • Real interest rate is the money rate of interest minus the rate of inflation
      • The higher the rate of interest
        • Mortgage payments rise so less AD for housing
        • Consumption decreases as borrowing is more expensive
        • Less investment as loss profitable due to rate of return
        • Lower AD
        • Marginal propensity to save would rise as savings are more attractive
      • Controlling the macroecon via changes in monetary variables such as the money supply or interest rates
      • Exchange Rates
        • Disadvantagof a Strong pound
          • Slower economic growth
          • Increase in the trade deficit
          • Impact upon business confidence and capital investment
        • Advantages of Strong Pound
          • Interest rates may be lower
          • Cheaper imports for consumers
          • Lower Inflation
          • Lower production costs for producers

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