2.6.1 and 2.6.2 demand-side policies

what are the 7 main macroeconomic obj

economic growth

2% inflation +/-1%

reduce unemployment

balanced budget

reduce inequality

environment

balance of payments

what are the two types of economic policy

demand side policy

supply side policy

what are demand side policies

policies which mainly affect AD

what are supply side policies

policies which mainly affect AS

what are the two types of demand side policy

fiscal policy

monetary policy

what is fiscal policy

the use govt spending and taxation to influence the economy

what is monetary policy

manipulation of interest rates and the money supply by the central bank

what is expansionary fiscal policy

increasing govt spending and decreasing taxes typically in recessions to stimulate the economy

what is contractionary fiscal policy

decreasing govt spending and increasing taxes typically in booms when demand pull inflation is very high

effect of decreasing income tax

yd increases = consumption increases = firms receive more sales = pay more corp tax

more money enters the circular flow (60%) = increases multiplier = GDP increases even more

evaluation for decreasing income tax

depends on MPW

depends on animal spirits

worsens budget deficit

define benefits trap

when consumers are better off staying unemployed and claiming benefits than earning an income

effect of decreasing corporation tax

higher profit margins = increases profit motive = greater incentive to set up or expand business = reinvest = increase production potential

increases FDI

lowers cost of production = SRAS shifts out

evaluation of decreasing corporation tax

depends on animal spirits = during recession = more hesitant higher fail rate

firms may use additional profit as bonuses or increasing dividends

govt investment may be more effective

effect of increasing corporation tax

lower profit margins = decreases the profit motive = lower incentive = no reinvestment = ppf shrinks

decreases FDI

increases costs = increased prices for consumers = cost-push inflation

evaluation of increasing corporation tax

budget deficit improves = govt investment will increase = more spending on education, healthcare and infrastructure

effect of increasing spending on education and healthcare

more education initiatives and education about health = talented and educated workforce = more productive

healthier workforce = live longer = work longer

evaluation of increased spending on infrastructure

worsens budget deficit

less workers in the labour market = decrease labour supply = demand higher wages = increases costs = SRAS shifts in