demand side policies 2.6

Role of demand side policies

Macroeconomic policies which are designed to influence AD

Monetary and fiscal policy

Show on an ad/as diagram the impact of demand side policy on moving from recession to full capacity

Shift in ad on lras to the right

Trade cycle diagram impact of demand management through demand side policies

Straight - trend level gdp

Level of gdp using fiscal

Level of gdp without policy intervention

Fiscal policy

Government method which influences the activity f spending and taxation

Tools of fiscal policy

Treasury- budget statement of planned speninding, taxiation for next year, sets levels of spend and tax

Expansionary fiscal policy

Stimulates growth- increase level of government spending on infrastructure, education healthcare, which will increase ad and boost economic growth

Disposable income- decrease/ cut in income tax, means consumers will have more disposable income after income tax, boosting spending and consumption and increasing ht eleven of ad, boosting economic growth

Decrease cooperation tax will encourage investment, boosting ad

Contractionary fiscal policy

Slowdown growth in economy- high inflation, unsustainable growth,

Decrease government spending- cut back on. Spending on infrastructure means less money flowing in the economy reducing the level of ad

Increase taxes- higher income tax, corporate tax, reduces th eleven of dispoable income which decreases the level of consumption and investment

Evaluation

Time lags- it takes time to indemnify economic problems such as inflation and recessions, government spending is potential growth, meaning it may take a long time for effects to be shown,

Trade off- all macroeconomic objectives can not be achieved simultaneously

Budget deficit

Government expenditure exceeds total revenue

Budget surplus target abdonadonment reasoning

Introduction of government spending in an recession to stimuate growth, meaning government spending exceeds revenue

Monetary policies tools

Designed to influence supply of money in economy - controlled by Bank of England - mpc

Base rate

Quantative easing

Factors considered when setting base rate

Consumption levels, investement by firms, economic cycles house pries, inflation

Base rate effect

Decrease inflation- raise base rate- increases costs of borrowing- banks raise interest rates, encouraging saving reducing ad and demand pull inflation

Stimulate economic growth- When the base rate is lowered- borrowing becomes cheaper, meaning it is easier for consumers and businesses to take a loan. There is an increase in consumeeer spending, increase investement, saving becomes less attractive

Evaluation

Trade off between macro objectives, no guarantee that the banks willl lower their interest rates, no guarantee for a decrease in the level of demand

Quantities easing

Bank of England creates digital money, with the money they buy government bonds, which pushes prices of bonds up and decreases interest rates, making borrowing cheaper and boosting consumption and investment, boosting ad

Evaluation

Long term inflationary pressure as an increase in ad, can lead to less supply and a need for an increase in prices