Monetary, Fiscal, and supply-side policies, Conflicts between objectives and policies

T2 CC6 (Keywords)

Monetary policy

The process by which a country’s central bank controls the supply of money and interest rates to influence the economy, aiming to control inflation, stabilize currency, and promote employment.

Interest rate

The cost of borrowing money or the return on savings, usually expressed as a percentage. Central banks set the benchmark interest rate to influence economic activity.

Bank rate

The interest rate at which a country’s central bank lends money to commercial banks. Changes in the bank rate influence other interest rates in the economy.

Quantitative easing (QE)

A monetary policy tool where a central bank buys financial assets (like government bonds) from commercial banks to increase the money supply and encourage lending and investment.

Quantitative tightening (QT)

The reverse of quantitative easing. It involves a central bank selling financial assets (like government bonds) to reduce the money supply in the economy.

Fiscal policy

The use of government spending and taxation to influence the economy. Fiscal policy is used to manage economic activity, control inflation, and reduce unemployment.

The Budget

A financial plan created by the government, outlining its expected revenue (from taxes) and planned spending for the year ahead.

Budget (fiscal) deficit

When a government’s spending exceeds its revenue (tax income) in a given year, meaning it has to borrow money to cover the difference.

Budget (fiscal) surplus

When a government’s revenue exceeds its spending in a given year, allowing it to save or pay off debt.

Direct tax

A tax that is paid directly by individuals or organizations to the government, such as income tax or corporate tax.

Indirect tax

A tax that is added to the price of goods and services, which consumers pay indirectly. Examples include VAT (Value-Added Tax) and excise duties.

National debt

The total amount of money the government owes to external lenders and domestic creditors, accumulated from borrowing over time.

Supply-side policies

Economic policies designed to increase the productive capacity of the economy by improving the supply of goods and services. These can include measures to improve efficiency, competition, and innovation.

Market-based supply-side policy

Policies that encourage competition and reduce government intervention in markets, such as reducing taxes, privatization, and deregulation.

Interventionist supply-side policy

Policies where the government intervenes directly in markets to improve economic supply, such as investing in education, infrastructure, and healthcare.

De-regulation

The removal or reduction of government restrictions and regulations in an industry to promote competition and efficiency.

Privatisation

The transfer of ownership of a business, service, or asset from the government to private individuals or companies.