Economics Section C Part 2

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What are policy instruments?
The tools used by government to achieve its macroeconomic objectives. They are economic variables e.g. rate of interest & taxation, levels of gov expenditure.
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How can they help the government achieve its aims?
Changes in policy instruments can affect other variables e.g. aggregate demand, inflation, unemployment, GDP.
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What are economic policies?
The actions a gov might take when controlling the economy and trying to achieve its macroeconomic objectives.
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What do both fiscal and monetary policy influence?
Aggregate demand. They are demand-side policies.
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What is fiscal policy?
Use of taxation and expenditure to influence aggregate demand. Can also affect behaviour of firms and individuals.
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What is monetary policy?
Use of interest rates or the money supply to influence aggregate demand.
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What are supply side policies?
Aim to improve productive potential of an economy. Promote economic growth by increasing aggregate supply. Can lower UE and inflation. Operate over longer term than demand side policies.
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How do supply side policies focus on the labour market?
Try to make them more flexible by weakening trade unions and improving the quality of labour- training and education.
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How do supply side policies focus on the capital market?
Try to increase investment by firms e.g. tax system has been used to increase the money available to firms for investment,
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How do supply side policies focus on the goods market?
Promote more competition in goods markets, e.g. through privatisation and deregulation.
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What other policies are there?
Environmental- e.g. taxation and deregulation to help protect environment; exchange rate policies- used to influence current account on BoP. Involves influencing the rate at which one currency exchanges against another.
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What is a budget? What does it detail? What happens if it is not equal?
Plan of what gov will spend and receive. Details how much will be spent in each category of expenditure and how the money will be raised. Spend more than receive-deficit, must borrow. Receive more than spend- surplus.
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What is expenditure? Give examples of categories of expenditure.
Amount spent by the government on the provision of services etc. Helathcare, education, defence, debt interest, social services, transport, social protection (pensions, UE benefit, disability allowances)
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Why might taxes be imposed?
To pay for public sector services; to discourage activities like smoking; to control aggregate demand; to reduce the gap between rich and poor.
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What are direct taxes? Give examples.
Taxes imposed on incomes and wealth, e.g. income tax, inheritance tax, corporation tax, capital gains tax.
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What are indirect taxes? Give examples.
Taxes imposed on spending, e.g. VAT, excise duties, customs duties, property tax, airport tax.
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What are environmental taxes? Give examples.
Taxes levied to protect the environment by encouraging or discouraging certain activities, e.g. landfill tax, climate change levy, aggregates levy (quarrying).
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What is expansionary fiscal policy?
Used to stimulate demand. Spend more/tax less. Will increase budget deficit.
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What is contractionary fiscal policy?
Used to cut demand. Spen less/tax more. Will reduce budget deficit.
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How can fiscal policy tackle inflation?
Use a contractionary fiscal policy. If it is demand pull inflation, cut demand by raising taxes/cutting expenditure. This will reduce the pressure on prices.
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How can fiscal policy tackle unemployment?
Use an expansionary fiscal policy. Spending more/taxing less will encourage firms to produce more and take on more workers if demand increases.
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How can fiscal policy help economic growth?
Use an expansionary fiscal policy. Gov spending, e.g. on infrastructure, will help stimulate growth. Tax cuts are less effective as some money is spent on imports.
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How can fiscal policy tackle a current account deficit?
Use a contractionary fiscal policy- if aggregate demand falls, then demand for imports will fall.
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What are interest rates and how do they affect demand?
The price paid to lenders for borrowed money. A lot of demand is fuelled by borrowed money so interest rates can affect the economy.
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How are base rates set in many countries?
By the central bank. All other interest rates in the country are influenced by this.
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How do high interest rates affect firms and consumers?
Firms- less investment, more interest on loans so lower profits, higher exchange rates mean exports more expensive, imports cheaper. Consumers- less spending, less income (higher mortgages), higher saving (as better returns).
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How do low interest rates affect firms and consumers?
Firms- more investment, less interest on loans so higher profits, lower exchange rates mean exports cheaper and imports more expensive. Consumers- more spending, more income (lower mortgages), less saving (as lower returns).
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What is the money supply and what does it affect?
The total amount of money that circulates in an economy. It influences aggregate demand. Trying to control growth of the money supply is difficult.
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How can monetary policy affect inflation?
Use a tight monetary policy. High IRs and a lower MS will cut demand and reduce pressure on prices.
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How can monetary policy affect unemployment?
Use a loose monetary policy. Lower IRs and a growing MS will help increase demand. Firms will take on workers and increase output.
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How can monetary policy promote economic growth?
Use a loose monetary policy. Lower IRs and a growing MS qill encourage investment and increase demand.
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How can monetary policy help cut a current account deficit?
Use a tight monetary policy. Lower IRs will lower the exchange rate- exports are cheaper, imports are more expensive. Export demand will rise and import demand will fall.
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What do supply side policies aim to do?
Promote labour flexibility; promote competition through privatisation, deregulation, and helping small firms; increase public and private secot
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What will increase in labour productivity is higher?
Aggregate supply.
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How can labour productivity be increased?
Improve flexibility (weaken TUs, flexible working practices); incentives (lower taxes on profits & income, lower state benefits); improve quality (education & training); increase workforce (immigration, retirement age, women)
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How can supply side policies improve efficiency in product markets (which will increase supply)?
Promote competition, reduce red tape- privatisation breaks up state monopolies, deregulation removes rules and regulations that prevent business activity and prevent competition, help small firms to increase supply (lower taxes, advisory centres).
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How can supply side policies increase supply in public and private capital markets?
Will increase if there is more investment. Public sector- invest in infrastructure, education, training, healthcare. Private sector- investment encouraged if economy stable, IRs low and incentives exist.
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Other cards in this set

Card 2

Front

How can they help the government achieve its aims?

Back

Changes in policy instruments can affect other variables e.g. aggregate demand, inflation, unemployment, GDP.

Card 3

Front

What are economic policies?

Back

Preview of the front of card 3

Card 4

Front

What do both fiscal and monetary policy influence?

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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