Economic Policies Flashcards
Describe fiscal policy
Fiscal policy is meant for the government & is used in situations to expand the economy or constrict it. It only involves government spending, taxes & borrowing.
What is a recessionary gap and how can a country close it?
A recessionary gap is when the current level of economic performance and unemployment are lower than expected.
In order for a country to close this gap they can implement 1 of 3 policies. If they implement NO POLICY, the economy (which is self fixing over time) will force ages to be reduced, costs to fall and AS to increase.
If they implement MONETARY POLICY, they would have to increase the supply of money which will decrease interest rates, which will increase investment spending, which will increase AD and close the gap.
If they implement FISCAL POLICY, they can decrease taxes which will increase the amount of disposable income, which will increase AD, or they can increase government spending which will increase AD.
How can the SARB affect the money supply
The SARB can increase or decrease the money supply by means of 3 different methods.
1) increase or decrease the reserve ratio/requirements
2) increase or decrease the repo rate
3) buy or sell government bonds
Explain how the SARB creates money
When someone deposits money into the bank, the bank is required to hold a certain percentage of it by law. The rest they are able to loan out to other people.
In order to calculate the added amount of created money, you will have to calculate the multiplier (1/the reserve ratio) & multiply that by the amount the bank was able to loan out.
List any 3 policies Developing Countries can use to promote economic growth
Opening economies to international trade
Controlling population growth
Encourage foreign direct investment
Establishing central banks
Increase productivity
Describe monetary policy
Monetary policy involves the supply of money and how the SARB is able to control interest rates and the AD curve.
A productive activity that creates substantial external benefits should be…
Encouraged by subsidization
Government’s economic role is complicated by the fact that…
Economic decisions are made in a political context
GDP understates that the amount of economic activity in S.A because it excludes…
Work performed by people in their own homes
How do you calculate real GDP from Nominal
Nominal amount/ ‘real’ = the deflator (price index/ base index
Marginal propensity to consume =
Change in consumption/change in income
It represents the slope of the consumption function.
Multiplier is calculated by…
The ratio between the eventual change in income & the initial investment
Eventual change / initial investment
The personal distribution of income refers to…
The way in which income is distributed among specific households
Name and explain the 3 uses of money
Money as a medium of exchange - used to barter and transfer goods & services
Money as a store of value - allows you to save and store the value of your effort
Unit of account - money helps measure the relative value of different goods and services
Explain the process of expansionary monetary policy
SARB buys government bonds
Money supply ⬆️
Interest rates fall ⬇️
Consumption & investment ⬆️
How do you calculate the present value of money from the future
The value amount/ (1 + interest rate)^years
What are the goals of expansionary monetary policy
Speed up economy ‼️
⬆️ employment
