Macroeconomic objectives AB’s policies 2.6

Explain the role of demand side policies

They are macroeconomic policies designed to influence the level of ad

There are 2 categories- monetary and fiscal

On a diagram, what is the impact of successful demand side policy in the economy from recession to full capacity

Keynesian diagram, positive shift to right for ad

Trade cycle diagram the impact of demand management through demand side policies

Axis- gdp time

Dotted straight line- trend level of gdp

Pink low line- level of gdp using fiscal policy

Lower red line- level of gdp without policy intervention

Fiscal policy

The way government influences economic activity through spending and taxiation

Tools in fiscal policy

The budget annual statement issued by treasury of planned spending, tax and borrowing for next year

Direct tax

Taxes set on people and business- income tax, inheritance tax

Indirect tax

Tax on goods and services- ad valeram tax, vat

Difference between gov budget deficit and surplus

Deficit- gov spending exceeds total revenue from taxiation

Surplus- gov spending is less than total revenue from taxiation

Automatic stabilisers

Spending and taxiation happen automatically in the economy

Discretionary spending

The government makes active decisions to change the level of spending

Effect on AD Expansionary

Gov spending- increases, increasing AD

Disposable income, after income tax, increases consumption

Company profits after corporation tax leads to investment

Limitations of fiscal policy

Time lags, trade off, imperfect data

Monetary policy

Deliberate action by government designed to influence supply of money in economy, controlled by Bank of England