6) Evaluate Causes And Consequences Of Output Gaps - MMT Flashcards
How can negative output gaps be caused by AD? (Talk about C and S)
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
How can negative output gaps be caused by AD? (Talk about G and T)
The government may reduce spending, cut public services (‘austerity’) or equally increase tax rates on incomes, goods and services
How can negative output gaps be caused by AD? (Talk about X and M)
Higher than usual exchange rates may reduce exports but increase the popularity of imports
How can negative output gaps be caused by AD? (Talk about I)
Low levels of business confidence may decrease I, an outcome compounded by the reverse accelerator effect
What does NOGs stand for?
Negative Output Gaps
Other than AD what can NOGs be caused by?
Shift left in the SRAS curve
When will SRAS shift left?
If costs faced by companies increase across the board, or if companies were struggling to access the resources they need
What are POGs?
Positive Output Gaps
What are POGs caused by?
Normally occur when the economy starts to overheat, eg in a period of economic boom
What is an economic boom caused by?
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
What are the negatives of NOGs?
Result in unemployed resources, especially (through not exclusively) labour
What sort of problems can high unemployment of Labour cause?
Social problems, crime, I’ll-health, further lack of AD, high government expenditure on benefits, low tax revenue etc
What can high unemployment of land and capital cause?
Harm to company profits, government tax revenue etc
What are the advantages of NOGs?
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
What can POGs do in the short term?
Seem to bring benefits to an economy- full employment, high wages, high income and high levels of expenditure
What are the disadvantages of POGs in the long term?
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
How can POGs make businesses less efficient?
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
Why can you not conclude that a POG is better than a NOG?
It depends on many different things
When is a NOG or a POG far less damaging? (time)
In a short period rather than an extended period
When is a NOG or a POG far less damaging? (Recession/boom)
A deep recession or large boom will cause far more harm than a small recession/boom
When is a NOG or a POG less damaging? (relation to other countries)
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
Why could a NOG or POG be inevitable?
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
