government objectives Flashcards
what is economic growth?
an increase in the productive potential of the economy
what is long run growth?
caused by an increased in capacity or productive potential of the economy
what is short run growth?
due to an increase in aggregate supply and AD
how does a PPF show short and long run growth?
movement from point A to B is short run
shift in curve is long run
what does a negative output gap mean?
- neg output gap occurs during a recession
- economy is underperforming
- downwards pressure on inflation
what does a positive output gap mean?
- boom unemployment is low and resources are being overused
- upwards pressure on inflation
benefits of economic growth?
- increase D for labor leading to a fall in unemployment and higher incomes
- higher wages
- greater profits -> higher incomes and spend more
- increase the governments tax revenue
- improve govts fiscal position
- benefits to the environment (firms invest in cleaner production processes)
costs of economic growth?
- income inequality
- higher wages = promotion so more stress
- demand-pull inflation
- deficit in the balance of payments
- industrial expansion
- habitats exploited and destroyed
what is an example of a demand side shock?
- boosted consumer confidence eg house prices rising and increasing consumer spending
- recession in trade may cause exports to decrease
what is an example of a supply side shock?
- poor harvest reduces the supply of food, reduces the economy’s capacity
what is the term animal spirits?
a term describing how economic agents behavior is often guided by instincts and emotion rather than economic realities
what is an asset price bubble?
prices increase beyond the assets true value
what are the main trade offs between macroeconomic objectives?
- unemployment and inflation
- economic growth and environmental protection
- economic growth and inflation
- inflation and equilibrium in balance of payments
- economic growth and reduction in inequality
what are the consequences of a current account deficit?
- loss of aggregate demand if there is a trade deficit which causes weaker real GDP growth and reduced living standards and rising unemployment
- big current account deficits will cause the currency to depreciate, leading to higher cost push inflation and deterioration in BoP
- currency weakness and higher inflation when country runs short of foreign currency reserves
- trade deficit might be a reflection of lack of competitiveness / supply side weakness of the economy
- some countries running current acc deficits may choose to borrow to achieve a financial surplus - increased risk
- unsustainable current acc deficit cal lead to a loss of investor consequence leading to capital flight and a currency / BoP crisis
what are living standards?
living standards refers to the amount of goods and services a person has access to. these can include goods and services that we can afford to buy and any public service provided by the state e.g. free healthcare and education. this can be measured by GDP per capita
