Monetary policy controls interest rates and the exchange rates, and is controlled by the Monetary Policy Committee or MPC for short in the UK). In the UK, the interest rate has been 0.5% for the past few years. Expansionary monetary policy is used during a time of low economic growth, and basically involves cutting the interest rate (defined as the cost of borrowing money and the reward for saving money). Cutting the interest rate makes it 'cheaper' for consumers and firms to borrow, which means that there will be an increased level of consumption, for consumers, and investment, for firms - they will increase their spending on capital goods, and this will lead to an increased level of aggregate demand in the economy, as well as growth. Contractionary monetary policy does the opposite.
Monetary Policy controls the MONEY SUPPLY as well as interest rates. Interest rates tend to move together, i.e. if the MPC raises the interest rate then high street banks will most likely follow. An increase in interest rates will lead to a decrease in INFLATION. This will also decrease house prices. MONETARY POLICY DOES NOT HAVE A MAJOR EFFECT ON GOVERNMENT SPENDING. However, a rise in interest rates may lead to more hot money flows into the UK, as it becomes more attractive to deposit money in banks in the country. There is an increase in demand for the pound, however, this leads to a rise in the price of the pound, which means that exports will decrease as UK goods become comparatively more expensive in comparison to foreign produced goods. Therefore, AD will decrease and the CURRENT ACCOUNT DEFICIT will worsen. The UK is focused on exporting services as opposed to goods, and therefore the few goods we do produce could be harmed even further. However, the higher exchange rate will lead to an increased demand for imports from abroad, leading to a rise in living standards as consumers have more choice and can buy goods from abroad at a comparatively lower price.
Fiscal Policy is best remembered as GIN AND TONIC! Well, GOVERNMENT SPENDING and TAXATION, but I remember it as G&T. Reducing business tax seems to come under supply-side policies, but it's still a fiscal one. Expansionary fiscal policy reduces taxes and increases government spending. Reducing taxes will hopefully lead to an increase in productivity in the economy, with workers being incentivised with an increased disposable income, and vice versa. Expansionary fiscal policy will increase aggregate demand (C+I+G+[X-M]), and an increase in government spending on public transport, for example, will increase the AD because everyone wants to go on the shiny new trains . . . Also, we mustn't forget the BUDGET! We currently have a budget DEFICIT in the UK, which basically means that government spending is greater than taxation. Was, for the government, anyway, as they have less money to spend. If the government needs to raise funds, they can sell bonds and stuff (A2 Economics territory here), or raise tax rates. We want a decent level of government spending to improve the country's productive capacity, with spending on education or the NHS etc. Going back to expansionary policies, however, an increase in government spending can lead to a MULTIPLIER EFFECT (yay), but if AD increases too much then we get inflation, which nobody likes, let's be honest . . . So, we then need to use contractionary fiscal policy in order to reduce aggregate demand and rein in on all of that spending.
THESE ARE MY FAVOURITES! Probably because I'm optimistic and not prone to SHORT-TERMISM (evaluation point for government intervention right there). Basically, the purpose of these policies is to shift the LRAS curve to the right, which has the effect of improving all of the MEPOs simultaneously. Tip, never refer to the macroeconomic policy objectives as MEPOs in your essays straight away, you can after the first time you have called the by their full name then put 'MEPOs' in brackets, because some examiners will be unfamiliar with the term. Anyway, back to the point. In the short run, there will almost always be conflict between the MEPOs, e.g. the Phillips Curve showing the conflict between inflation and unemployment. However, with education and training, for example, we can improve all four! How, you may ask? Well, by increasing the human capital of our workers, we can become more efficient and out output will increase. Education may lead to more ENTREPRENEURIALISM, which means that our products will be cooler (you know what I mean), increasing their demand. As labour is a derived demand, this means more jobs, which will lower the level of unemployment. On top of this, we will be exporting more, improving our BALANCE OF PAYMENTS ON CURRENT ACCOUNT. Finally, inflation will fall due to a lower price level as production becomes more efficient, and cheaper.
I literally didn't have a clue what these were for ages. A POSITIVE OUTPUT GAP occurs when ACTUAL GDP is higher than TREND GDP, and vice versa for the NEGATIVE OUTPUT GAP. When we have a positive output gap, there is usually a boom and everything's great because employment is rising and there's economic growth . . . However, there will eventually be increased inflation, reducing our international competitiveness and then worsening the balance of payments. Sigh. Conversely, when there is a negative output gap, we are producing below our PRODUCTIVE POTENTIAL (oh no!) which means that the government must try to stimulate aggregate demand (usually following a recession or a slump). There is usually low output and high unemployment. I'll define unemployment for you - someone is unemployed when they are actively seeking work but unable to find work.
GDP - gross domestic product. The total value of all goods and services produced in an economy over a period of time. While I'm at it, here's a definition I always forget: ECONOMIC GROWTH - THE CAPACITY OF THE ECONOMY TO PRODUCE MORE GOODS AND SERVICES OVER TIME. Ugh, I don't like that one. Anyway . . . REAL GDP has been adjusted for inflation, but NOMINAL GDP hasn't.
GNP - gross national product. It's basically the same as GDP, except that it includes NET INCOME FROM FOREIGN INVESTMENTS ABROAD, e.g. money earned from UK citizens working abroad, or UK residents owning shares in a foreign firm etc. For example, Steve has shares in American Steel (yes I just made that up, I think), which is based in New York. So when Steve gets his dividends (lucky Steve), he also is contributing to GNP. Good old Steve.
Hope this helps! Pussy King
[Change in GDP (£ billions) / Original GDP (£ billions)] X 100 = % Change in ECONOMIC GROWTH
Total GDP / Population Size = GDP per capita
Real GDP is adjusted for inflation, whereas nominal GDP is not. This short video may help you convert the two - https://www.khanacademy.org/economic...ith-a-deflator
I am an A2 student so I don't do those formulas, but this is what I have. Hope that helps!