Macroeconomics Policies | A-Level Economics
What is fiscal policy?
use of G and T to influence AD
What is expansionary fiscal policy?
When the government increase spending or reduce taxes, to increase aggregate demand.
When would you use expansionary fiscal policy?
- to reduce (cyclical) unemployment
- increase economic growth
- increase inflation up towards 2%
Expansionary fiscal policy evaluation
- budget deficit
- government spending is higher than tax revenue for the tax year
- there is an increase in national debt (the budget deficit accumulating each year)
- interest repayments increase
- austerity measures in future - tax increase or spending cuts
- living standards are likely to worsen
- crowding out effect
What is contractionary fiscal policy?
When the government decreases spending or increase taxes, to decrease aggregate demand.
When would you use contractionary fiscal policy?
- inflation is too high
- national debt is too high
Contractionary fiscal policy evaluation
- unemployment and economic growth worsen (Philips curve)
- since aggregate demand in the economy decreases
- firms are required to produce less goods and services
- less real gdp
- labour is a form of derived demand so firms will layoff workers
- those people will have less disposable income
- living standards and inequality will both worsen
What is monetary policy?
The use of interest rates by the central bank to influence AD
What are interest rates?
The cost of borrowing or the reward for saving.
What is expansionary
What is expansionary monetary policy?
When the central bank reduce interest rates, to increase aggregate demand.
When would you use expansionary monetary policy?
- reduce (cyclical) unemployment
- increase economic growth
- increase the inflation rate towards 2%
- to correct a current account deficit
- current accouunt deficit is when imports exceed exports
- not meeting one of the main macro objectives
- AD is getting lower as we are spending more abroad
- interest rates lower
- lower reward for saving
- hot money leaves the UK economy
- less demand for the pound so it depreciates
- imports become more expensive and exports become cheaper
- less imports and more exports
Expansionary Monetary Policy Evaluation
- Liquidity trap
- Impact on the balance of trade
What is contractionary monetary policy?
When the central bank increase interest rates, to decrease aggregate demand.
When would you use contractionary monetary policy?
- inflation is too high
- correct a current account surplus
- higher interest rates
- higher reward for saving
- more hot money entering the UK economy
- higher demand for pound means it appreciates
- imports become cheaper and exports become more expensive
- less exports and more imports
Contractionary Monetary Policy Evaluation
- Liquidity trap
- Impact on the balance of trade
What are supply-side policies?
Policies that cause an increase in productive potential (LRAS)
When would you use supply-side policy?
- to reduce the inflation rate
- to reduce a current account deficit
- to reduce structural unemployment
Supply-side policy evaluation
- opportunity cost (HS2 projected to be £100 billion)
- time lag (HS2 started around 2012)
Why are Supply-Side Policies so useful?
- they are the only way to achieve long-run (potential) economic growth as they do not cause inflation.
- Supply-side policy works really alongside demand side policies (fiscal or monetary) to reduce inflation.
Worksheet
- Expansionary fiscal policy
- Description:
- Diagram:
- Good macroeconomic effects:
- Bad macroeconomic effects:
- Evaluation points:
- Contractionary fiscal policy
- Description:
- Diagram:
- Good macroeconomic effects:
- Bad macroeconomic effects:
- Evaluation points:
- Expansionary monetary policy
- Description:
- Diagram:
- Good macroeconomic effects:
- Bad macroeconomic effects:
- Evaluation points:
- Contractionary monetary policy
- Description:
- Diagram:
- Good macroeconomic effects:
- Bad macroeconomic effects:
- Evaluation points:
- Supply side policy
- Description:
- Diagram:
- Good macroeconomic effects:
- Bad macroeconomic effects:
- Evaluation points: