GDP GAPS Flashcards
What are GDP Gaps?
A GDP gap is when actual GDP does not equal potential GDP.
What is a Recessionary GDP Gap?
A recessionary GDP gap occurs when an economy’s actual output is less than its potential output, leading to high unemployment and economic slowdown.
What is an Inflationary GDP Gap?
An inflationary GDP gap happens when an economy’s actual output exceeds the potential output, causing inflation and economic expansion.
How can a Recessionary GDP Gap be fixed?
Aggregate demand must be increased
How can an Inflationary GDP Gap be fixed?
Aggregate demand must be decreased
What is Fiscal Policy?
Fiscal Policy is the use of government spending to influence the economy. It aims to stabalize the economy by addressing GDP Gaps.
How can Fiscal Policy be used to eliminate an Inflationary gap?
Contractionary fiscal policy can be used to address this gap as it increases taxes and reduces government spending. (Decreasing AD, shifting it to the left)
How can Fiscal Policy be used to eliminate a Recessionary gap?
Expansionary fiscal policy can be used as it cuts taxes and increases government spending. ( Increasing AD, shifting it to the right)
Recognition Lag
Time to identify the problem.
Decision Lag
Time for policymakers to agree on a response.
Implementation Lag
Time to enact policies (eg. passiing a budget)
Impact Lag
Time for policies to affect output, employment and inflation.
What is a Stimulus Package?
A stimulus package is a series of economic measures applied by a government to stimulate a stressed economy. It’s objective is to reinvigorate the economy by boosting and spending unemployment.
What is an Economic Shock?
Unexpected events that significantly disrupt the balance of supply and demand in a market.
What are some demand shocks?
*Fiscal Policy Changes - government increases or decreases spending and taxation
*Monetary Policy Shifts - central banks change interest rates or money supply
*Consumer & Business Confidence - economic uncertainty or optimism affects spending and investment
*Global Events - financial crises , wars, or pandemics
What are some Supply Shocks?
*Oil Price Shocks - sudden changes in oil prices affect production costs
*Natural Disasters - earthquakes, hurricanes, or droughts disrupt production
*Technological Changes - innovations can boost productivity
*Labor Market Disruptions - strikes, migration, or demographic change affect workforce availability
*Geopolitical Events - war & political disruptions
What is Transmission Mechanism?
The transmission mechanism describes how changes in monetary policy such as, interest rate adjustments affect financial conditions, expectations, economic activity, and ultimately, inflation.
