Demand-side policies-2.6.2

Monetary policy

the manipulation of interest rates and the supply of money to influence aggregate demand and thus achieve economic objectives

fiscal policy

the manipulation of government spending and taxation to influence aggregate demand to achieve government objectives

gov budget surplus

value of gov revenue (taxation) > value of government expenditure

gov budget deficit

value of gov revenue (taxation) < value of government expenditure

direct tax + example

a tax on income or wealth, a progressive tax e.g. income tax

indirect tax + example

a tax on spending on goods and services. a regressive tax. e.g. VAT

target of BOE

achieve target of 2% of inflation

policy responses to 2008 financial crisis

base rate lowered to 0.5%

quantitative easing implemented to boost money supply

cut in vat

government spending increased in order to stimulate the economy

bailing out of banks

strengths of demand-side policies

can relatively quickly affect ad, stimulating/contracting the economy helping to achieve macroeconomic objectives

weaknesses of demand-side policies

classical economists argue that demand side policies will have no affect on long run output

expansionary policies will cause inflation

contractionary policies will cause unemployment

always will be some time lags e.g. interest rates take 18-24 months to affect mortgage repayments