How the government manages the economy
What's covered
Key facts
Fiscal policy
A balanced budget means government revenue equals government spending over the period.
Monetary policy
Bank Rate is the core interest rate in the UK and the Bank of England's MPC decides what level it should be.
Policies to correct positive and negative externalities
Government can provide information to consumers and producers so that they better understand the costs or benefits of a good.
Supply-side policies
AQA names supply-side policies such as investment in education and training, lower direct taxes, lower taxes on business profits, trade union reform and privatisation/deregulation.
Fiscal policy
Budget balance = government revenue minus government spending; a negative result is a deficit and a positive result a surplus.
Monetary policy
A higher Bank Rate raises charges on many mortgages and loans and gives savers a bigger return, so people spend less and inflation falls.
Policies to correct positive and negative externalities
Markets over-produce goods that generate external costs, and under-produce goods whose marginal social benefit is above the private benefit.
Supply-side policies
A cut in corporation tax gives firms more retained profit for investment, but firms may instead pay it to shareholders or save it.
Fiscal policy
If revenue is insufficient to pay for expenditure, the government has a budget (fiscal) deficit.
Monetary policy
Higher interest rates tend to discourage businesses from taking out loans to fund investment.
Practice questions with answers
A taste of the 45 questions in this topic, answers marked. Sign up to practise the full set with spaced repetition.
Which of these best describes fiscal policy?
- ✓Changing government spending and taxation
- •Changing interest rates set by the central bank
- •Changing laws on trade union strike action
- •Changing the amount of money banks can lend
Which body sets Bank Rate in the UK?
- ✓The Bank of England's Monetary Policy Committee
- •The Chancellor of the Exchequer
- •The Office for Budget Responsibility
- •The Treasury Select Committee of MPs
Which policy best corrects the negative externality from factory pollution?
- •A cut in firms' corporation tax
- •A subsidy for the goods firms produce
- ✓A tax on the pollution firms produce
- •Free state provision of the goods
What is the main aim of supply-side policies?
- •To cut the government's budget deficit quickly
- •To keep inflation at exactly 2%
- •To raise aggregate demand in the short run
- ✓To raise the economy's productive capacity
When government spending is greater than government revenue in a year, the government has a:
- •Balanced budget
- ✓Budget deficit
- •Budget surplus
- •Trade deficit
Since which year has the Bank of England been independent in setting interest rates?
- •1979
- •1992
- ✓1997
- •2008
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