4.2.4 - Policies

Define Monetary policy.

Use of interest rates by the central bank to control money supply in an economy. (not AD)

Define Fiscal policy.

Use of government spending and taxation to influence AD.

Define supply-side policies.

Economic measures aiming to improve the long-run productive capacity and efficiency of an economy. Also aiming to promote competition + innovation + incentives.

What is the monetary policy tool “Quantitive easing”?

• Central Banks buy assets like government bonds and loans from commercial banks (increases money supply)

• Encourages banks to lend more and increases consumption

Examples of supply-side policies.

• Tax cuts

• Deregulation (less paper work)

True or false: Interest rates shift AS in short run.

False.

Interest rates don’t shift AS in short run as they don’t affect firms immediate cost of production.