Increase in Component of AD- C/G Flashcards
Macro-Economic Stability
Growth-2.5%- tailored towards investment and exports
Inflation- target 2%- cost and demand led
Unemployment- currently at 5.1%
Trade- balance between exports and imports of goods and services as well as investment and transfers.
At below Fe
Positive multiplier effect- growth, unemployment (demand deficient)
Little effect on inflation due to spare capacity within the economy- (however cost push may still exist)
Trade will worsen as unemployment falls
- trade of, between unemployment and trade but all together beneficial for the economy
At Fe
Positive multiplier effect will only increase inflation- demand led and will have very little effect on growth.
Inflation will cause standard of living to fall.
Unemployment will have fallen to its maximum, only voluntary unemployed.
Trade will deteriate: 1) Demand can not be met 2) inflation reduces competitiveness
In the long run
Accelerator effect may begin to take hold:
If confidence is strong and growth returning then growth may be accompanied by increases in investment.
Shifting out LRAS- important in the long run.
However:
Consumer and government led growth has a number of key issues:
1) Does not aid rebalancing which Carney says is so important in the long term
2) Consumer led growth may cause increased household debt, causing problems in the long term for stability
3) Government financed growth causes resource and finance crowding out which makes it hard for firms to invest and there is not the resource or capital available.
4) Government budget deficit may increase causing reduced confidence and expectations in the economy.
Introduction
Introduce the component of AD- Consumption done by households on goods and services. Government spending on current and capital goods.
Look below and at full employment and the longer term outlook on the economy, as well as assessing what effect this may have on rebalancing.
