External Factors Part 1 Flashcards
what are the two types of fiscal policy?
expansionary and contractionary
what are expansionary policies designed to do?
increase the money supply, encourage spending and capital investment which happens during deflation (when prices decline)
what are the taxes and spending rules related to expansionary policy and some examples?
decrease tax rates
- increase transfer payments (unemployment benefits)
- increase spending on roads, bridges
- increase government spending to stimulate new jobs and employment
exs. purchasing federal securities,
lowering discount rate,
decrease reserve requirements for member banks
what are contractionary policies designed to do?
prevent economy from growing too rapidly minimizes inflationary pressures
when consumers choose to increase saving, overall spending decreases
what are the taxes and spending rules related to contractionary policy and some examples?
increase tax rates
- decrease transfer payments (unemployment benefits)
- decrease spending on roads, bridges
exs. selling federal securities, raising discount rate, increase reserve requirements; reduction in export subsidies reduces government payments to exporting business
if actual GDP exceeds potential GDP
economic growth is not sustainable and eventually prices and wages will be bid up resulting in inflation
what industry is uninfluenced by economic upturn or downtown?
health care
inflation affects accounting measures that take place over….
extended periods of time (ie. depreciation) because they are based on historical costs
when a recession occurs, what has happened to real GDP, economic output, employment and disposable income?
it has been in decline for at least two consecutive quarters
all three decrease
what are the 4 components in the business cycle?
recession (contraction)
expansion (recovery)
trough
peak
what are the 6 characteristics of a recessionary (contraction) phase?
- unemployment increase
- potential national income > actual national income
- decreases in demand (including for raw materials) and in payments for goods and services
- rising costs
- falling prices
- two consecutive quarters of negative GDP growth (decline in output not prices)
what are the 4 characteristics of an expansion (recovery) phase?
- economy growing: stocks in bull market
- inflation nearing target rate
- unemployment decreasing
- increased aggregate demand and prices
what are the 3 characteristics of a trough phase?
- transitionary phase: economy hits bottom
- low or stagnant growth
- high unemployment
what are the 5 characteristics of a peak phase?
- transitionary phase: economy “overheating”
- excessive inflation and growth
- unemployment at its natural rate
- businesses cannot meet excessive consumer demand
- prices rise
elastic demand is…
price elasticity of demand > 1
% change in QD > % change in P
TR decreases if P increases
price elasticity of demand
% change in QD / % change in P
unit elastic is….
price elasticity of demand = 1
% change in QD = % change in P
TR not sensitive to P
inelastic demand is..
price elasticity of demand < 1
% change in QD < % change in P
TR increase if P increases
frictional unemployment
due to imperfections in the labor market and relates to workers searching for jobs, waiting to take jobs in the near future (entering the workforce or between jobs)
cyclical unemployment
due to fluctuation in the business cycle, by a deficiency of aggregate spending (recession vs expansion)
structural unemployment
changes over time in the structure of consumer demand, which alters the structure or composition of the demand for labor (technological changes and required skill sets)
full employment unemployment
the sum of frictional and structural unemployment; does not mean zero unemployment
seasonal unemployment
due to changes in seasons (snowmobiles only in winter)
stagflation (cost push inflation)
whenever actual unemployment is significantly greater than the natural level, and these conditions are couple with high rates of inflation caused by an increase in the costs of production (labor/energy prices) which pushes aggregate supply left
market equilibrium shifts to higher prices and lower output
what is the general idea of inflation?
what areas does it affect/not affect?
rising prices; low unemployment
affects: health care, wages and materials
does not affect: expenses based on historical costs, fixed costs or fixed interest costs
deflation
general decline in prices due to a long-term drop in aggregate demand accompanied by low interest and discount rates signals and impending recession
what are some examples of economic indicators that create a lag?
chronic unemployment
change in the index of labor cost per unit of output
average prime rate charged by banks
ratio of manufacturing and trade inventories to sales
commerical and industrial loans outstanding
ratio of consumer installement credit outstanding to personal income
change in the CPI for services
what are some examples of economic indicators that lead?
orders for consumer/producer goods
housing starts
consumer expectations
initial claims of unemployment
consumer price index
measures the rate of inflation by comparing the average change in relative prices between two periods of time for a market basket of consumer goods
what are the 3 objectives of fiscal policy?
- stabilize GDP growth by growing it to near potential through government spending and taxation
- better distribution of income/wealth by giving support to the disadvantaged through transfer payments and subsidies
- improve resource allocation by directing resources to industries/sectors through special tax provisions or subsidies
