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
What are the goals of contradictory monetary policy?
Slow down economy 🚲
⬇️ inflation
Explain the process of contradictory monetary policy
SARB sells government bonds
Money supply ⬇️
Interest rates ⬆️
Consumption & investment ⬇️
How to calculate the real interest rate
Nominal rate - expected inflation
What are the supply factors of economic growth?
Natural resources 🌳
Labour ⚒
Capital 💵
Entrepreneurship 🗝
Explain the supply factor of:
Natural resources 🌳
Resources may be dependent on season or whenever they are demanded.
Reserves may sometimes be exploited
Explain the supply factor of:
Labor ⚒
Size & quality of labour (people available to work within a country)
Depends on - immigration, health, gender, education & training (✈️ 🚑 👫 📒 🏋🏽)
Explain the supply factor of:
Capital 💵
Manufactured means of:
Buildings, equipment, machinery & roads
🏣 📠 🎛 🛣
Eexplain the supply factor of entrepreneurship 🗝
People who can identify opportunities and exploit them by combining the other factors of production
Government should encourage entrepreneurship
Explain the demand factor of domestic demand
It is made up of consumer spending, investment spending, and government spending
Any match in domestic demand should be matched by an increase in supply otherwise there will be inflation and problems with balance of payments
Explain the demand factor: export demand
Increase in exports raises growth rates
Maintenance of a realistic exchange rate
Provision of finance, marketing and other assistance to South African exporters
Explain the demand factors: import substitution
Manufacture previously imported goods domestically
Explain at least three causes of low economic growth.
Institutions
Geography
Culture
How to derive GNI from GDP?
All income earned by residents of other countries as well as all wages and salaries of foreign workers must be subtracted.
All income earned by South Africans in other countries as well as all wages and salaries of South Africans in other countries must be added
Give the formula for GDP
GDP = C + I + G + X - Z
What is GDE?
Gross Domestic Expenditure:
The total value of spending within the borders of a country.
GDE = C + I + G
How to calculate the Gini Coefficient?
Inequality/ entire right angle area
Basic assumptions of the simple Keynesian model
Economy consists of households and firms only
No government or foreign sector
Prices are given and Wages are given
Money stock and interest rates given
Spending is the driving force that determines the level of economic activity
Explain the equilibrium level of income in words.
Income (Y) is at its equilibrium level when it is equal to the level of aggregate spending (A)
How to calculate the full equilibrium level of income
Y = 1/ 1-c(1-t)+m [C+I+G+X-Z]
Functions of the SARB
Formulate and implement monetary policy
Service to the government
Provision of economic and statistical services
Maintenance of financial stability
Explain the demand for money
Refers to the amount that the various participants in the economy plan to hold in the form of money balances.
Briefly describe a Moral Hazard Problem
The possibility that individuals or institutions will change their behavior as the result of a contract or agreement
Briefly describe an Adverse as election Problem
A problem arising when information known to one party to a contract or agreement is not known to the other party causing the latter to incur major costs
Explain how to calculate the equilibrium level of income using the withdrawals and injections approach
S + T + M = I + G + X
Where:
S = -C* + (1-c)Y
T = tax amount
M = import amount
Calculate either the real GDP or the GDP deflator
GDP Deflator = nominal GDP/Real GDP x 100
How to calculate real GDP using nominal GDP and price indices
Price index = nominal GDP / real GDP x 100
