Basic concepts issues and relationships of macroeconomics part 2 Flashcards
What is the role of government in the macroeconomy?
The government intervenes to influence economic activity, addressing instability in the free market economy.
What are the three types of economic policies used by the government?
- Fiscal Policy 2. Monetary Policy 3. Growth Policies
What does fiscal policy refer to?
Fiscal policy refers to taxation and expenditure decisions of the government.
What is monetary policy?
Monetary policy involves the government’s policies regarding the growth of money supply, availability of credit, and interest rates.
How does monetary policy help the economy?
It aims for price stability, full employment, and economic growth, and is a tool for controlling inflation.
What are growth policies?
Growth policies focus on stimulating aggregate supply rather than demand management.
What is supply-side economics?
Supply-side economics argues that government policy should stimulate aggregate supply rather than manage demand.
What are the major flows in the economy?
Production, income, and spending/expenditure.
What is the essence of economic activity?
The essence of economic activity is production.
What creates income in the economy?
Production creates income, which is then spent to purchase products.
What are the factors of production?
Natural resources, labor, capital, entrepreneurship, and technology.
What is the relationship between income and spending?
Income is spent to satisfy wants by all sectors of the economy.
What are the components of spending in the economy?
Consumption expenditure by households, investment expenditure by firms, government spending, and foreign sector spending.
What is the circular flow of goods and services?
It is the flow of goods and services between households and firms in the goods and factor markets.
What are injections into the circular flow?
Government spending and investment spending.
What are withdrawals from the circular flow?
Taxes and savings.
What are the key objectives of macroeconomic policy?
- Full employment 2. Balance of payments stability 3. Economic growth 4. Equitable distribution of income 5. Price stability.
What is the main aim of monetary policy?
To achieve low and stable inflation.
What is the fallacy of composition?
What is true for a single case may not be true for the whole.
What is the difference between correlation and causation?
Correlation does not imply causation.
What is the difference between stocks, flows, and ratios?
Production, income, and spending are flow variables, while stock variables are measured at a specific point in time.
What should not be confused with levels?
Do not confuse levels with rates of change.
