What are the three policies the government uses to achieve its four macroeconomic objectives?
Fiscal, monetary and supply-side
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What will the government do if the economy is growing too quickly?
Use a contractionary policy to reduce the level of economic activity and national income and slow down the demand for imports
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What will the government do if economy is not growing quickly enough
Use expansionary policies to stimulate the level of economic activity, raise national income and reduce unemployment
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What will a contractionary policy include?
Higher interest rates, tax increases and cuts in government expenditure
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What will an expansionary policy include?
Lower interest rates, tax cuts and increase government expenditure
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What is fiscal policy?
Changes in the levels of taxation and government expenditure in order to influence the level of activity in the economy
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What is a public sector deficit?
It occurs when government spending exceeds the government's income and it must borrow to fund the difference
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What is an expansionary fiscal policy?
Tax is reduced and government expenditure is increased, less tax is paid so people have more disposable income and employment will rise, rise in consumption, businesses increase output, AD increases and economy grows
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What is a contractionary fiscal policy?
Tax is increase and G is reduced so people have less disposable income and employment will fall, C will fall, businesses decrease output so AD decreases as does the economy
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What is monetary policy?
Using interest rates to very the costs of borrowing and influence the level of AD
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What does the Bank of England set?
The base rate which influences all the interest rates set by other banks
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What happens if interest rates are increased?
Consumers have to pay more to take out loans and use credit cards, so C is reduced, those with mortgages have to pay back more every month, businesses have to pay more to obtain finance so investment it reduced
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What is an expansionary monetary policy?
Base rate is reduced, the cost of borrowing falls, there is a rise in C and I, more goods are consumed and businesses increase output, unemployment falls and AD increases and the economy grows
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What is a contractionary monetary policy?
Base rate is increased, the cost of borrowing increases, there is a fall in C and I, fewer goods are consumed so businesses decrease output, unemployment rises, AD decreases and the economy slows
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What are supply-side policies?
All measures designed to increase the productive capacity of the economy by influencing aggregate supply
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What do supply-side policies help to do?
Help increase productivity
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How can supply-side policies reduce inflationary policies?
If AS is growing then AD can be expanded without causing excess demand which leads to inflation
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What are some supply-side policies?
Cuts in tax and benefits, improving education and training, grants and subsidies and privatisation
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How do high interest rates help keep the pound strong?
Investment in sterling assets become more attractive compared to other currencies which increases the demand for pounds
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Other cards in this set
Card 2
Front
What will the government do if the economy is growing too quickly?
Back
Use a contractionary policy to reduce the level of economic activity and national income and slow down the demand for imports
Card 3
Front
What will the government do if economy is not growing quickly enough
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