theme 2 - pack 9 and 10

what is a monetary policy

influence ad through interest rate, money supply and quantitative easing

central banking

what are interest rates

reward for saving money or the price of borrowing money

what is an expansionary / reflationary monetary policy

lowering interest rate, increase money supply, use of quantitative easing

what is a contractionary/ deflationary monetary policy

increase interest rate, decrease money supply , stopping quantitative easing

what are the benefits of monetary policy

• increase AD

• cheaper than fiscal

• politically independent

• easy to change

• can help with cost push inflation

what are the limitations of monetary policy

• time lags

• meeting inflation target is difficult

• depends on external factors

what are the objectives of public expenditure

• overcoming market failure and improving efficiency

• redstribute income and wealth

• macro-economic management

what are automatic stabilisers

some forms of government expenditure and tax revenues change automatically

what is fiscal policy

use of government spending and taxation to influence AD

what is expansionary fiscal policy

reduce tax ,increase gov spending and borrowing

what is contractionary fiscal policy

increase tax , decrease gov spending and borrowing

what are the benefits of fiscal policy

• impacts are wide reaching

• targets specific industries or regions

what are the limitations of fiscal policy

• gov finance can be a constraint

• time lags

• unintended impacts on incentives

what are the benefits of public spending

• spending on education,infrastructure an dhealthcare can increase productivity

• an injection to the economy

• greater income inequality

• correcting market failure

what are the drawbacks of public spending

• low productivity

• crowding out

• impact on government finances

what is crowding out

when extra government spending leads to lower private sector spending

financial crowding out → when gov spending is financed by borrowing. reduce incentive and ability for private sector to invest

respurce crowding out → when economy is at full employment. lack of resources for private sector

what is a structural fiscal deficit

an estimate of how large the deficit would be when economy is at normal level

what is a cyclical deficit

occurs because gov spending and revenue fluctuate. during recession spending will be high but revenue will be low

what are the cyclical causes of fiscal deficit

• gdp / position in trade cycles

what are the structural causes of fiscal deficit

• demographic pressure

• discretionary fiscal policy

• high levels of tax avoidance/ evasion

• high levels of income and wealth inequality