Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Demand-Side-Policies (1)
Document related concepts
Economics of fascism wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Non-monetary economy wikipedia , lookup
Quantitative easing wikipedia , lookup
Money supply wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Business cycle wikipedia , lookup
Helicopter money wikipedia , lookup
Keynesian economics wikipedia , lookup
Transcript
DemandSidePolicies THISLESSON NEXTLESSON Consider thedifferencebetween monetary&fiscalpolicy(K) Exploretheoriginsandcharacteristics ofFiscalpolicy(AP) Identify bothasdemandsidepolicies (K) Analyse theeffectsthatchangesin Fiscalpolicyhasonaneconomy(AN) Exploretheoriginsandcharacteristics ofmonetarypolicies– interestrates& changestothemoneysupply(AP) Evaluatetheeffectthatchangesin governmentspendinghaveon economicgrowth.(AP) Analyse theeffectsthatchangesin monetarypolicyhasonaneconomy (AN) Identify thecharacteristicsof differenttypesoftaxes(K) Consider alternativepoliciesfor economicrecovery/growth(EV) Consider theimpactofchangesin taxationoneconomicindicatorsand macroeconomicobjectives(AN) Demandsideeconomics Aneconomictheorythat advocatesuseof governmentspending andgrowthinthemoney supplytostimulatethe demandforgoodsand servicesandtherefore expandeconomic activity Twotypesofdemandsidepolicy Monetarypolicy– controlsflowofmoneythrough interestratesandchangestomoneysupply. Fiscalpolicy– controlsGovernmentspendingand TaxationwhichinfluenceAD Usetheimagesabovetowritea paragraphtellingthestoryofthebirthof demandsideeconomics. Monetarypolicy Interestrates TheK marks- monetarypolicy……. qUsesinterestratestoinfluencethelevelsofconsumerspending andAggregateDemand(AD). qIntheUKthetargetofMonetarypolicyistokeepinflationwithina targetofCPI2%+/-1. qUKMonetaryPolicyissetbytheMonetaryPolicyCommittee (MPC)oftheBankofEngland. qTheyareindependent insettinginterestrates,buthavetotryandmeet thegovernment’sinflationtarget. BankofEnglanduse interestratesandQuantitative Easingtocontroltheflowofmoney Rememberthatexaminersarelookingfor adetailedandlogicalchainofargument Canyoubuildatimelineofeventsaround thischart? Challenge - Howdoesachangein interestratesimpactinflation? A P1 P2 B AD2 Y2 AD1 Y1 Draw2ASADDiagramsandexplain 1)IncreaseinIR 2)DecreaseinIR WhatchallengesdoyouthinktheBankof Englandfaceoverthenext12months? Monetary Policy Quantitativ eeasing TheK marks qIncreasing theMoneySupply qEncouragesmorelendingtofirmsandindividuals qUsedwheninflationislowandcannotreduceIR qLowers costofborrowing qEncouragesInvestment,Consumptionand growth qCouldincreaseInflation MonetaryPolicy Limitations Banksmightnotpassonrate changetoconsumers Banksaremoreriskaverseafter 2008financialcrash Firmsandconsumerconfidence needstobehigh forthemtospend 1. Define monetarypolicy(K) 2. IRarecurrentlyloose=low(AP)Why?(AP) 3. Explain&Evaluate impactoninflation(AN&EV) 4. Explain &Evaluate impactonunemployment(AN&EV)) 5. Explain&Evaluate impactonGovernmentspending(AN& EV) 6. Explain &Evaluateimpactonenvironment– doescapacity increase?(AN&EV) 7. Consider whathappenstoincomeinequality?(AN) Evaluate theimpactofmonetarypolicy onmeetingtheUKgovernments macroeconomicobjectives[20] Fiscalpolicy TheK marks qChanges bythegovernmenttolevelsoftaxationandgovernment spending inordertoinfluenceAggregateDemand(AD) andthelevelofeconomicactivity. qPurpose ofFiscalpolicy qStimulateeconomicgrowthinaperiodofarecession. qKeepinflationlow(UKgovernmenthasatargetof2%) qstabilisegrowth,avoidingaboomandbusteconomiccycle. qUsedinconjunction withmonetarypolicy.Governmentsoften prefermonetarypolicyforstabilisingtheeconomy. Challenge - Howdoesexpansionary(loose) fiscalpolicyimpactaggregatedemand? qTaxation qDisposableincome qBorrowing qIncrease qCut qAD qConsumerspending Expansionaryfiscalpolicyinvolves qGovernmentspending increasing AD(AD:AD2)throughthe increaseofgovernment qInflation spendingandacut intaxation.This willincreaseconsumerspendingas qGDP theywillhavemoredisposable income.Thiswillresultinanincreasein qTradeoff GDP(Y1:Y2)butmayalsobringthe tradeoffofinflationaspricesrise (P1:P2).Thiswilltendtoworsen the qWorsen governmentbudgetdeficitandthe governmentwillneedtoincrease qBudgetDeficit borrowing. DrawASADDiagramandexplain 1) ExpansionaryFiscalPolicy 2) Explainexpansionaryfiscalpolicyusingyourdiagramand thewordsprovided. Challenge - Howdoescontractionary(tight) fiscalpolicyimpactaggregatedemand? qDecreasingAD qBudgetDeficit qReduce qTaxes qConsumerspending Contractionaryfiscalpolicyinvolves qImprovement decreasingAD(AD1:AD2) Thereforethegovernmentwillcut qCut governmentspending(G)and qIncrease /orincrease taxes.Highertaxes willreduce consumer qGovernmentspending spending(C).Tightfiscalpolicywill tendtocauseanimprovement in thegovernmentbudgetdeficit. DrawASADDiagramandexplain 1) ContractionaryFiscalPolicy 2) Explaincontractionaryfiscalpolicyusingyourdiagramand thewordsprovided. UK Fiscalpolicy WhattypeoffiscalpolicydidtheUKgovernmentemployin 2009? Why? Whyisborrowingatitshighestin2009-10? LimitationsofFiscalPolicy • Thegovernmentmayhavepoorinformationaboutthestateoftheeconomyandstruggle tohavethebestinformationaboutwhattheeconomyneeds. • Toincreasegovernmentspendingwilltaketime.Itcouldtakeseveralmonthsfora governmentdecisiontofilterthroughintotheeconomyandactuallyaffectAD.Bythenit maybetoolate. • Someeconomistsarguethatexpansionaryfiscalpolicy(highergovernmentspending)will notincreaseAD,becausethehighergovernmentspendingwillcrowdouttheprivate sector.Thisisbecausegovernmenthavetoborrowfromtheprivatesectorwhowillthen havelowerfundsforprivateinvestment. • Freemarketeconomistsarguethathighergovernmentspendingwilltendtobewastedon inefficientspendingprojects.Also,itcanthenbedifficulttoreducespendinginthefuture becauseinterestgroupsputpoliticalpressureonmaintainingstimulusspendingas permanent. • Higherborrowingcosts.Undercertainconditions,expansionaryfiscalpolicycanleadto higherbondyields,increasingthecostofdebtrepayments.
