6) The importance of supply-side policies - MMT Flashcards
why are supply side policies vital?
due to their image as the drivers of long-run economic growth, it contrasts with monetary and fiscal policy, both of which primarily influence AD
when is increasing AD desirable?
highly desirable if the economy is in recession or is experiencing a large Negative Output Gap.
what are the issues with increasing AD?
increases in AD will only ever drive short run economic growth, unless it is matched by increased AS. Short run growth, driven just by increased AD will soon become unsustainable as too much money will end up chasing too few goods and services
long run growth is s….
sustainable
why is long run growth sustainable?
the economy has successfully riden out the peaks and troughs of the economic cycle and the trend growth line (of best fit) is upwards
what does long run growth cause for the economy?
the economy has growth in terms of capacity and potential
what are the 3 ways to demonstrate LR growth on a diagram?
1) Economic Cycle Diagram
2) PPF diagram
3) AS/AD
what does the Economic Cycle Diagram show? short term
the cycle shows the economy suffering recessions, downturns, experience recoveries and booms, all these are short-term phenomenons
what does the Economic Cycle Diagram show? long term
the trend growth line should be the average of all these ups and downs
in the UK what is the trend growth?
in the region of 2% PA. In the last 10 years, the UK economy has performed below this expectation
what does the PPF show?
The PPF diagram shows the economy operating at different points of full capacity and below full capacity (below curve)
what does the PPF show of a point is above the curve? what needs to happen?
if the economy is to grow long term then the point D needs to become sustainable, for this to happen the arc line has to move to the right, a higher possible combination of capital and consumer goods
what does LRAS/SRAS and AD meeting show?
meet at the equilibrium which may be Yfe - there is no spare capacity in the economy, any increase in AD or SRAS would be unsustainable
how can the economy achieve sustainable future growth? (AD/AS)
For the economy to experience stable future growth the LRAS curve will shift to the right. This will show the SRAS to follow suit and we extend along the AD line. This is a win-win higher RGDP at a lower PL
What is the true output of our economy derived from?
The combination of 4 factors of production being applied within the economy
