6) Evaluate Causes And Consequences Of Output Gaps - MMT

Question 1

How can negative output gaps be caused by AD? (Talk about C and S)

Answer 1

Typically AD will be lower than it should be, this can be caused by any of the 5 components of AD or any of the 3 leakages.
1) low consumer confidence could reduce C and increase S

Question 2

How can negative output gaps be caused by AD? (Talk about G and T)

Answer 2

The government may reduce spending, cut public services (‘austerity’) or equally increase tax rates on incomes, goods and services

Question 3

How can negative output gaps be caused by AD? (Talk about X and M)

Answer 3

Higher than usual exchange rates may reduce exports but increase the popularity of imports

Question 4

How can negative output gaps be caused by AD? (Talk about I)

Answer 4

Low levels of business confidence may decrease I, an outcome compounded by the reverse accelerator effect

Question 5

What does NOGs stand for?

Answer 5

Negative Output Gaps

Question 6

Other than AD what can NOGs be caused by?

Answer 6

Shift left in the SRAS curve

Question 7

When will SRAS shift left?

Answer 7

If costs faced by companies increase across the board, or if companies were struggling to access the resources they need

Question 8

What are POGs?

Answer 8

Positive Output Gaps

Question 9

What are POGs caused by?

Answer 9

Normally occur when the economy starts to overheat, eg in a period of economic boom

Question 10

What is an economic boom caused by?

Answer 10

Often caused by upsurges in consumer and business confidence, the government greatly increasing G or reducing T, exchange rates being so low that we can’t keep up with demand for exports etc

Question 11

What are the negatives of NOGs?

Answer 11

Result in unemployed resources, especially (through not exclusively) labour

Question 12

What sort of problems can high unemployment of Labour cause?

Answer 12

Social problems, crime, I’ll-health, further lack of AD, high government expenditure on benefits, low tax revenue etc

Question 13

What can high unemployment of land and capital cause?

Answer 13

Harm to company profits, government tax revenue etc

Question 14

What are the advantages of NOGs?

Answer 14

Eg it tends to reduce wage levels thus reducing company costs and at the same time it helps to keep the price level down/low inflation

These factors may increase the country’s international competitiveness over time

Question 15

What can POGs do in the short term?

Answer 15

Seem to bring benefits to an economy- full employment, high wages, high income and high levels of expenditure

Question 16

What are the disadvantages of POGs in the long term?

Answer 16

The benefits in the short term are not sustainable and there may be considerable long term damage done to the quality of the factors of production through their overuse

Question 17

How can POGs make businesses less efficient?

Answer 17

POGs are highly likely to be associated with high levels of inflation, damaging the international competitiveness of the economy, making businesses less efficient and unable to respond to any change in economic circumstances

Question 18

Why can you not conclude that a POG is better than a NOG?

Answer 18

It depends on many different things

Question 19

When is a NOG or a POG far less damaging? (time)

Answer 19

In a short period rather than an extended period

Question 20

When is a NOG or a POG far less damaging? (Recession/boom)

Answer 20

A deep recession or large boom will cause far more harm than a small recession/boom

Question 21

When is a NOG or a POG less damaging? (relation to other countries)

Answer 21

Depends on our position relative to other countries, if we have a small NOG but France are in a worse position then we may be able to tolerate the NOG. However if we have a NOG when the other economies are doing well it may reflect bad economic management by the government, poor levels of productivity within the workforce or both

Question 22

Why could a NOG or POG be inevitable?

Answer 22

Due to unforeseen circumstances, eg pandemic, natural disaster or war in Europe, in that situation the government would just try to ride out the storm and contain the damage caused