DEFINITIONS
POLICY TOOLS
CAUSE → EFFECT
DATA & APPLICATION
EVALUATION & TRADE-OFFS
100
Define economic growth.
An increase in the level of output of goods and services in an economy over time.
100
Name one tool of fiscal policy
Taxation / government spending.
100
How can higher interest rates affect spending?
Higher interest rates increase the cost of borrowing, reducing consumer spending and investment.
100
Inflation is rising. Which type of policy could be used?
Monetary or fiscal policy could be used to reduce aggregate demand.
100
Give one limitation of fiscal policy
It may reduce economic growth or increase unemployment.
200
Define fiscal policy
The use of government spending and taxation to affect macroeconomic objectives.
200
Name one tool of monetary policy
Interest rates / money supply.
200
How can higher taxes affect inflation?
Higher taxes reduce disposable income, lowering spending and reducing demand-pull inflation.
200
Unemployment is high. Which policy is most suitable in the long run?
Supply-side policies, as they increase productive capacity and sustainable employment.
200
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300
Define monetary policy
The use of interest rates and the money supply to influence aggregate demand in the economy.
300
What is the base rate?
The interest rate set by the central bank that influences other interest rates in the economy.
300
How can infrastructure spending reduce unemployment?
it creates jobs directly in construction and increases productivity, leading to more employment.
300
Economic growth is strong. Why might inflation increase?
Strong growth can increase aggregate demand, causing demand-pull inflation.
300
Why do supply-side policies take time to work?
Improvements in skills, infrastructure and productivity occur gradually.
400
Define supply-side policy
Government policies designed to increase the productive potential of the economy.
400
What is quantitative easing?
When a central bank purchases financial assets to increase the money supply.
400
How can education and training affect productivity?
It improves workers’ skills, increasing output per worker.
400
Why might supply-side policies not reduce unemployment quickly?
They take time to improve productivity and skills.
400
Explain one trade-off between inflation and unemployment
Policies that reduce inflation may reduce demand and increase unemployment.
500
Define demand-pull inflation
Inflation caused by an increase in aggregate demand that exceeds aggregate supply.
500
Name two examples of supply-side policies
Education and training; infrastructure investment; deregulation; privatisation.
500
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500
Why might contractionary fiscal policy reduce inflation but increase unemployment?
It reduces aggregate demand, lowering inflation but also reducing output and jobs.
500
Why is a combination of policies often more effective than one policy?
Different policies address different causes of economic problems.