Fiscal, Monetary and Supply side policies

What is a direct tax?

A tax on income and/or wealth - ie Income tax/inheritance tax

What is an indirect tax

A tax on spending - ie VAT/duties

when is there a Govt. budget deficit

when Govt. spending > revenue

when is there a Govt. budget surplus

when Govt. spending < revenue

what are some of the UK’s macroeconomic objectives

• Low unemployment

• inflation at 2%

• economic growth

• rising living standards

what does fiscal policy mean

fiscal policy is the use of government revenue collection and expenditure to influence a country's economy

what is Expansionary fiscal policy for

Higher employment and economic growth

what does expansionary fiscal policy include

• reducing taxes

• increasing government spending

what is contractionary fiscal policy for

sound government finances or to combat inflation

what does contractionary fiscal policy include

• increased taxes

• decreased government spending

what is aggregate demand

the total demand for goods and services in a market

how is aggregate demand calculated

AD = C+I+G + (X-M)

• C - consumption

• I - investments

• G - Government spending

• X - Exports

• M - Imports

what effect does raising income tax have on the labour market

• less of an incentive to work

• more economically inactive people

• decreased labour supply

what is a demerit good

a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable

How can the government help to redistribute wealth

• benefits

• spending on healthcare/education

• increasing taxes for more revenue to redistribute

what are the consequences of wealth redistribution measures

• encourages tax avoidance

• pushes people to emigrate

• an increase in corporation taxes discourages investments

what is monetary policy

A policy that aims to control the supply of money in an economy to meet objectives. It manipulates money supply and interest rates.

who controls monetary policy

the Bank of England (BoE)

what does expansionary monetary policy look to achieve

Economic growth and low unemployment

what does contractionary monetary policy look to achieve

Price stability and curb inflation

how does expansionary monetary policy work

interest rates are reduced which leads to increased spending, output and employment

how does contractionary monetary policy work

increased interest rates lead to reducded spending as the reward for savings increases

what is Quantitative Easing

The increasing of money supply from a central bank

how does Quantitative easing work

• the central bank buys bonds off other banks

• this gives banks loads of liquidity

• interest will be low so the banks will lend more

• this leads to increased borrowing n consumption

why might reducing interest rates not increase spending

there is limited supply of things to spend on OR consumers are predicting a rise again

why might a reduction in interest rates NOT increase borrowing

low consumer confidence

what is a supply side policy

policies that look to increase the productive potential of an economy

what does a Govt. hope to achieve with SSPs

an improvement in the quality of quantity of the FoP

What supply side policies exist

• Investing in Education and Training

• Limiting trade union power

• reducing direct taxes

• reducing benefits

• Privatization

• Development of infrastructure

What happens when the Govt. spends on education and training

• a workers’ human capital (quality) improves

• a better quality worker is more productive

• an increase in output

• productive potential increases

what is a trade union

an organised association of workers in a specific trade/industry formed to protect and promote their collective interests

how does limiting trade union power work

• reducing union power leads to less strikes

• less disruption to supply

• increase in production and so supply

How does reducing direct taxes impact economically inactive people

they may feel more encouraged to work if taxes are lowered as they take more of their pay home. So the labour force grows increasing supply

How does reducing direct taxes impact employed people

workers will be encouraged to work harder for more pay and work longer and seek promotion

why might reducing direct taxes not boost supply

• benefits may be high

• dependant on demand

• not enough opportunities

how does reducing benefits boost supply

• benefits are cut

• lower income households have less money

• more of an incentive to find work

• more people in employment

how does reducing direct taxes impact businesses

• corporation tax is reduced

• businesses have more money

• incentive to invest in the FoPs

• TNCs will be attracted to a place with low tax and productive capacity will increases

what is privatisation

the transfer of assets from the public sector to the private sector (usually whole businesses or industries)

how does privatisation boost supply

• private companies will compete

• increased job opportunities

• private companies are profit driven

what is infrastructure

the physical and technical networks and facilities that support a country’s economy.

how does investing in infrastructure boost supply

• infrastructure is developed

• movement of the FoPs improves

• Efficiency of the FoPs improves

• productive potential increases

what are the costs of supply side policies

• time lag

• costly

• Equity issues

• Unintended effects