Macroeconomics Flashcards
where will the economy always be at in the long run
the economy will always be at full unemployment
what indicators in macroeconomics tell us how the economy is doing
growth -> indicator of income and living standards in economy
unemployment -> keep it low
inflation -> rate of growth of prices in an economy
trade -> looking at the value of imports of goods and services compared to the value of exports of goods and services
distribution of income -> how incomes are distributed across households in an economy
what are the different macroeconomic objectives
growth to be strong, sustained and sustainable -> growth is measure of living standards so want that to be high and sustained over time
low unemployment, full employment
low and stable inflation rate 2% (+-1%)
balanced trade in and out of country (trade deficit, trade surplus)
fair distribution of income -> idea of fair changes of whoever is in charge
Why did the UK use heavy expansionary fiscal policy during covid?
massive increases in government spending -> huge increase in healthcare spending on NHS + furlough scheme paying wages of employed and self-employed despite no production of goods and services taking place
massive tax cuts -> VAT cut for industries that were hit hardest e.g. leisure, hospitality, tourism from 20% to 5%
these industries were exempt from paying business rates -> tax on the value of physical property
why?
To increase aggregate demand -> bring economy out of recession + close the negative output gap and propel the economy towards recovery
increase inflation to avoid deflation with increased AD
increased AD to keep unemployment low
consequences:
demand pull inflation
massive budget deficit
aid and globalisation havent really been tested yet so make heavy revision on that
do this video when rest of notes are made and understood
https://www.youtube.com/watch?v=ZlJ8TfmzgL4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=3&ab_channel=EconplusDal
https://www.youtube.com/watch?v=kJAJiFEmzLg&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=4&ab_channel=EconplusDal
what is the circular flow of income and draw it illustrating the different parts
a useful way of modelling the economy
model - https://www.youtube.com/watch?v=2BINy9AzHhQ&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=5&ab_channel=EconplusDal
what is the equation for calculating an index number
an index always has a base year of 100
Index number = (raw number / base year raw number) x 100
What is GDP and what does it measure
GDP -> the value of all goods and services produced in an economy annually
-measures growth
-measures living standards as it measures income
What is the problems with using GDP as a measure of economic growth
Double counting -> when the value of output in the primary sector is included again when the primary commodity is manufactured again into something in the secondary sector -> inflates the final figure
informal activity isn’t accounted for e.g. black market, illegal activity (businesses that aren’t registered), DIY work etc.
errors given the vast data collection
negative externalities of production aren’t included -> e.g. cost of air pollution, resource degradation, loss of biodiversity
Income inequality -> nothing in GDP mentions the distribution of income
the output produced -> e.g. if majority was capital it wouldn’t benefit consumers much + only benefits firms -> takes a long time for it to benefit consumers
other quality of life aspects GDP takes into account that would benefit living standards -> level of healthcare, education in society etc.
What is GDP per capita and what does it measure, give the equation to calculate it
GDP per capita gives us an average measure of individual incomes in an economy
calculated by GDP / Population
what are the issues of GDP per capita
remittances (when a worker leaves a country to work abroad and earn higher income, with that income being sent back to their home country)-> GDP per capita doesn’t take into account any factor income made abroad e.g. domestic business working abroad -> even though that income is clearly raising living standards
influence of FDI -> foreign business comes and produces in a home country -> will increase their GDP figure -> however a lot of the income generated will be sent back to their own home country and wont stay within the domestic economy
what is GNI and what is it used for, what is the equation to calculate it
GNI is used to find the total income generated by a countries factors of production regardless of where they are located
as long as the worker or firm is domestic, it will be included in GNI -> therefore FDI will not be included as is foreign
GNI = GDP + net factor income (income earned by domestic workers/firms - income earned by foreign workers/firms who operate at home)
what does green GDP account for that other measures don’t, how is it calculated
accounts for the environmental costs of production -> which can massively effect living standards
Green GDP = GDP - Environmental costs
takes away all negative externalities from the GDP to find more accurate living standards
what are the problems with using green GDP
putting monetary value on environmental costs are quite subjective
GDP could dramatically fall -> too politically sensitive
Define economic growth
an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS
increased AD -> increases economic growth
what is the equation to calculate AD
AD = C + I + G + (X - M)
draw the diagram for the economic/business cycle and show the 4 phases of the cycle
Diagram -https://www.youtube.com/watch?v=CBvM3YqsJYs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=9
show a positive and negative output gap aswell
define recession
two successive quarters of negative economic growth
define a boom in an economy
Growth faster than trend rate -> high profits + low unemployment + high consumer and producer business confidence + high demand imports + rising tax revenues
however this boom also causes inflation
define a recession/trough
Declining AD -> high unemployment -> sharp fall in consumer/producer confidence and investment -> destocking and discounting of goods by firms + lower inflation + low demand for imports
define a recovery
rising consumer confidence -> higher house prices -> rising business confidence -> higher investment -> increase in construction
what are the benefits of economic growth
higher disposable income
higher employment
higher profits of firms
fiscal dividends for gov (increase in tax revenues)
what are the costs of economic growth
inflation
income inequality e.g. one sector dominates the economy, poor quality jobs, lack of welfare state
environmental costs -> producing goods from it -> e.g. deforestation, palm oil production -> cause negative externalities in production -> welfare loss
current account deficit -> incomes rise -> household incomes rise -> increase in imports spending -> widens the current account deficit
evaluation points for economic growth
Sustainable growth
inclusive growth
balanced growth
role for private sector/ gov
define unemployment
consists of those of working age who are willing and able to work, actively seeking work but who do not have a job
what is the labour force survey, and give the equation to work out the unemployment rate
a method of measuring unemployment in an economy
a survey that works out:
-the number of employed people
-number of unemployed people
-number of economically inactive people
Unemployment rate = Unemployment / Economically active labour (employed + unemployed) x 100
what is the claimant count
a measure of the total number of people who are claiming unemployment benefits
what are the issues with the claimant count
very difficult to compare between countries
not everyone will claim
not everyone can claim
could be subject to fraud
what are evaluations you can make to unemployment measures (labour force survey, claimant count)
sampling errors -> very tiny sample of people may not reflect the entire domestic economy
cost
hidden unemployed -> discouraged workers that tried many times to get a job but then gave up and dropped out labour force -> not counted as unemployed
inactive groups -> carers, early retired, people who are reliant on their spouses income ->workers with high productive potential for the economy -> wont be counted as they aren’t willing to work
under employed -> part time work is considered fully employed, workers on 0 hour contracts -> wrong to be recorded this way
what is cyclical unemployment
when there is a lower AD in economy there is less need for firms to employ labour -> labour is derived from the demand of goods and services -> if growth is low, there will not be much demand for labour
leads to an increase in unemployment
show a diagram demonstrating this
what is structural unemployment
the immobility of labour:
occupational immobility of labour -> person doesn’t have the skills necessary to enter a new industry
geographical immobility -> workers are not willing to move due to e.g. family ties
what is frictional unemployment
occurs when workers are between jobs -> left a job and are looking for another
what is seasonal unemployment
workers that have worth depending on the season e.g. summertime for the tourism industry
what is casual unemployment
workers that have contracts that end at random times might be casually unemployed until they get a new contract
what is real wage unemployment
where wages are fixed above the equilibrium in the labour market -> causing an excess supply of labour
what is inflation
the persistent increase of prices in an economy in a year
how do we carry out a consumer price index (CPI)
Family expenditure handed out to households -> to write down every fortnight the goods and services they buy, the prices they pay, the quantity, where they are buying them from and the % of income that is being spent on them
A consumer basket is then formed of the most popular goods/services which represents what the average family is buying over the fortnightly period with the average prices of them attached
prices of the goods/services are weighted based on the % of income (0-1)
weighted prices are then added to give total weighted price of the basket
index of them is created which is updated yearly
what is demand-pull inflation, draw a diagram demonstrating it
shift of AD to right due to increase in demand, may be caused by:
decreased interest rates
decreased income tax
increased consumer/business confidence
increased government spending
weak exchange rate
diagram -https://www.youtube.com/watch?v=q8LwZkid740&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=14
what is cost-push inflation, draw a diagram representing it
increased cost of production for firms -> decreased supply as a result
caused by:
increased price of raw materials
increased wages
increase business taxes e.g. VAT
increased price of imported raw materials due to a weaker exchange rate
what are the costs of high inflation
lower purchasing power -> consumers can buy less with the same amount of money
erosion of savings -> increased costs for things make people go through their savings faster
lower export competitiveness -> if inflation is higher in one country than the others then that country becomes less internationally competitive -> reducing demand for exports -> reducing revenue from exports
wage spirals -> increased price of things -> people ask for higher wages -> higher wages are given and increases costs of production for firms so pass on costs as higher prices -> increasing inflation -> workers ask for higher wages again etc.
fiscal drag -> inflation is rising + workers are receiving higher income -> only in line with inflation therefore the workers are not better off -> however may get dragged into a higher tax band and make themselves worse off -> if tax bands rise with inflation however it isn’t a concern
define cyclical unemployment and show it on a diagram
when there is a deficiency in demand in the economy for goods and services (perhaps due to a recession so people have less income to spend) -> less demand for firms to hire labour therefore less demand for labour
what are the two types of immobility of labour and describe them
occupational immobility of labour -> when workers dont have the skills to enter a specific market
geographical immobility of labour -> when workers are unable to move for work due to e.g. family ties
frictional unemployment
occurs when workers are in between jobs
therefore are searching for a new job and are unemployed for the time being
may be e.g. seasonal
what are the benefits of low and stable inflation
workers with higher wages
benefits of low and stable inflation
workers with higher wages
consumption is natural -> consumers buy goods and services when they need too (not anticipating anything)
firms encouraged to increase output -> firms can raise their prices and earn more revenue -> make more output + sell more at a higher price -> earn more
can keep unemployment low in a recession -> (we know in a recession its normal for firms to sack workers as revenues are falling and is a good way to keep revenues under control and their profit margin at a decent level) ->
give eval points of inflation
the rate of inflation
the cause of the inflation
the duration of the inflation
how stable the inflation is
deflation
the persistent fall of prices in an economy in a year
what is demand-side deflation and what does it come with
bad deflation
bad because -> if AD shifts left and a recession is caused in the economy -> recessions don’t just go away -> they last for a while -> the deflation could last at the same time -> even though there are policies to increase AD and get the economy out of recession, they take time to work -> deflation could be long term as a result and could become anticipated
occurs when ad shifts to the left
draw diagram for it
https://www.youtube.com/watch?v=PX9XdZGsFXs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=16
comes with lower economic growth
deflation can be long term and anticipated (an assumption but likely)
supply side deflation
good deflation
occurs when SRAS shifts to the right
good because -> comes with higher economic growth -> more likely to be short term and unanticipated -> as values of e.g. raw materials change a lot
show on diagram
https://www.youtube.com/watch?v=PX9XdZGsFXs&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=16
comes with higher economics growth
this type of deflation is more likely to be short term and unanticipated
if deflation is anticipated it is dangerous because…
deflationary spiral -> consumers delay their spending (why buy now if in a couple of months prices will be even lower?) -> consumption is gonna fall now -> reduce AD -> lower growth and higher unemployment over time
real interest rates will always be positive -> (nominal interest rate - inflation rate) -> money saved will still be gaining value even if there is a no interest rate as prices of goods are falling -> saving makes more rational sense -> AD reduces further -> more deflation -> lower growth + higher unemployment
when deflation -> increases the real value of debt as when prices fall in economy -> profits for business and incomes for workers are going to be falling at the same time -> prices are falling firms will be making less revenue -> hit their profits and also -> if consumers are delaying spending -> firms are not going to be making as much profit
short term deflation is beneficial because
lower prices for consumers -> buy at cheaper prices -> improve their living standards -> purchasing power increases
falling input prices for firms -> sell goods at a cheaper price -> increased revenue
what are the evaluation points for deflation
anticipated or unanticipated
cause
what are the three different parts of the balance of payments (this is a major macroeconomic objective of government)
current account
capital account
financial account
what does the current account measure (the 4 different points)
measures trade (the value not quantity)
Trade in goods
Trade in services
(both of them together are known as the trade balance)
Income -> measures income entering and leaving the country
transfers
if overall figure is negative -> CA deficit
if overall figure is positive -> CA surplus
What are the causes of a current account deficit demand side
Strong domestic growth -> people more willing to buy imports
Recession overseas -> demand for exports fall -> revenue generated from it decreases
Strong exchange rate -> imports will be cheaper + exports will be more expensive ->
What are the causes of a current account deficit Supply side
low investment
low productivity
high relative inflation
high unit labour costs
poor quality/reliability
Depletion of resources
show a diagram about the current account deficit
https://www.youtube.com/watch?v=xLJEAdgDI5w&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=18
what is the exchange rate
the price of one currency, in the price of another currency
https://www.youtube.com/watch?v=dc8QzXnqhxc&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=19
what would cause the exchange rate to appreciate, show it on a diagram
appreciated exchange rate (e.g. the pound can buy more of the dollar)
https://www.youtube.com/watch?v=kAD02OZ9_Sc&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=20
Increase in relative interest rates (interest rates in the UK higher than everywhere else for example) -> incentivises foreigners to put money into UK economy as they provide great returns
if traders anticipate a rise in the pound -> move their money into pounds -> let it rise in value and take it away so they can make a profit
increase in FDI -> foreign firms enter the UK and set up in the UK -> they have to pay for factories in pounds + workers in pounds, machinery in pounds etc. -> exchange their money into pounds -> increases demand for the pound -> appreciation
rise in incomes abroad -> foreigners might demand UK exports -> they got richer and might demand stuff produced in the UK so therefore have to buy in pounds
what would cause exchange rates depreciates
can buy less of another currency
diagram
https://www.youtube.com/watch?v=kAD02OZ9_Sc&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=20
fall in interest rates
firms moving away from Britain
increase in incomes domestically
what happens when a currency is strong. draw a diagram for it
SPICED
strong
pound
imports
cheaper
exports
dearer
increased demand for imports
increased expenditure on imports
demand for exports fall
revenue from exports falls
https://www.youtube.com/watch?v=qwitOb7eRv4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=21
what happens when a currency is weak, show a diagram
WIDEC
weak pounds
imports
dear
exports
cheap
imports become expensive
demand for imports decrease
expenditure on imports fall
demand for exports increase
revenue from exports increases
diagram:
https://www.youtube.com/watch?v=qwitOb7eRv4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=21
what does the exchange rate depend on
PED for exports and imports
size of the appreciation or depreciation
restrictions on trade -> i.e. tariffs that increase the price of the good in other countries -> so may not export more
offset by other factors
aggregate demand
the total demand for a countries goods and services at a given price level in a given time period
aggregate demand
https://www.youtube.com/watch?v=UnaQjVeTP6k&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=22
reasons why consumption would increase
level of real disposable income -> income tax
interest rates/availability of credit -> lower interest rates incentivises consumption
consumer confidence
reasons why saving would occur
interest rates
consumer confidence
range/trustworthiness of financial institutions
tax incentives e.g. ISA
age structure of population
reasons why investment would occur
interest rates -> low interest rates -> low cost of borrowing -> firms have a greater incentive to borrow money and then invest
high business confidence -> expected profit to be high -> more likely to increase investment to meet the future level of demand
low corporation tax -> high retained profit -> more likely to invest
accelerator effect -> increase in rate of real GDP in economy -> encourages further investment
why is government spending done
governments will often spend to influence the level of economic activity -> influence long run and short run growth
1) current spending e.g. maintenance of public services and payment of public sector wages
2) capital spending
e.g. infrastructure projects
3) welfare spending
e.g. benefits and pensions
4) debt interest payments
factors that would shift the AD curve (focusing on net exports)
real disposable income earned abroad
real disposable income earned at home
strong or weak exchange rates -> spiced, widec
protectionism at home and abroad
relative inflation levels at home
draw both SR aggregate supply and LR aggregate supply
https://www.youtube.com/watch?v=BtgMwqHcRMc&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=28
what would shift the SRAS curve in an economy
wages
raw material prices
oil price
business taxes
import prices
what would shift the LRAS curve in an economy
increased labour productivity
investment
quality of labour -> productivity
competition
show the negative and positive output gap diagrams
https://www.youtube.com/watch?v=SunVMj-c_ak&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=29
positive ouput gap - overuse of labour or
when do negative output gaps occur, draw a diagram for it
where actual output is less than potential output
https://www.youtube.com/watch?v=-es6BW0ytdg&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=32
when do positive output gaps occur, draw a diagram for it
where actual profit is greater than potential output
https://www.youtube.com/watch?v=-es6BW0ytdg&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=32
what are the two types of fiscal policy and what is it
changes to government spending and taxation in order to influence AD
Expansionary fiscal policy
Contractionary fiscal policy
expansionary fiscal policy outcomes
Boost growth -> if growth is sluggish or economy is in recession
reduce unemployment -> e.g. cyclical if economy is in recession if AD shifts right so more goods/services produced and an increase in derived demand
increase demand-pull inflation -> maybe a slight increase in inflation is desirable?
redistribute income -> gov spending on welfare benefits + reduction in tax rates in lower tax bands or reduction in regressive taxation
contractionary fiscal policy outcomes
reduce inflation
reduce budget deficit/national debt
redistribute income
reduce current account deficit
what are some examples of expansionary fiscal policy
reduction in income tax -> e.g. cut in income tax for people in higher tax bracket
reduction in corporation tax -> increase retained profit for business -> increase investment
increase in government spending
expansionary fiscal policy that will shift LRAS
reduction in income tax -> encourages economically inactive labour to enter the labour force
reduction in corporation tax -> boost in investment -> boost in AD + LRAS (by increase of quality and quantity of capital + productive efficiency)
increase in government spending -> government spending on education and health -> boost productivity of labour -> boost quality of labour + increase LRAS
however primary policy of AD is to boost AD, this is only a side effect
how does expansionary fiscal policy lead to multiplier effect
increase in AD will lead to higher incomes in the economy -> more spending -> more AD -> more incomes -> more spending etc.
what are the problems with expansionary fiscal policy
demand pull inflation
current account deficit
both trade-offs of the policy
worsening of government finances
crowding out effect -> government spending is heavily borrowing fuelled -> reduce private sector investment
x-inefficiency
time lags
what are the problems with expansionary fiscal policy
demand pull inflation
current account deficit
both trade-offs of the policy
worsening of government finances
crowding out effect -> government spending is heavily borrowing fuelled -> reduce private sector investment
x-inefficiency
time lags
expansionary fiscal policy evaluation
size of the output gap
size of the multiplier
consumer/business confidence
state of gov. finances
LR returns to the Gov
Laffer curve ideas
role of automatic stabilisers
crowding out vs crowding in
classical view of self-correcting economy in a recession
what are automatic stabilisers, give examples
fiscal policy tools to influence GDP and counter fluctuations in the economic cycle
progressive income tax system
welfare benefits
Boom (cushions demand)
increased incomes -> workers pushed into higher tax bands -> increased average rate of tax -> slows down increases in consumption
Unemployment low -> gov spending on benefits reduces
Recession (supports output)
decreased incomes -> workers move into lower tax bands -> decreased average rate of tax -> prevents large drop in consumption
if unemployment high -> gov spending on benefits increases
What is a budget deficit
when government spending is greater than the tax revenue gathered in a year
what is structural budget deficit
budget deficit at full employment
what is cyclical budget deficit
budget deficit in a recession
what is national debt
total stock of government debt over time
what are the pros of a budget deficit/national debt
higher growth, lower unemployment
benefits of increased gov spending (education, healthcare, infrastructure, public services)
redistribution of income
crowding in
what are the cons of a budget deficit
deterioration of government finances
inflation conflict
current account deficit conflict
crowding out effect
x-inefficiency
eval points for budget deficit
state of government finances
SR and LR impacts
stage of economic cycle
specific policy used
consumer/business confidence
automatic stabilisers
what is a budget surplus
when tax revenue is greater than government spending in a year
pros of budget surplus
confidence in government finances
flexibility with fiscal policy
less crowding out/x-inefficiency
lower inflation and CA deficit
cons of a budget surplus
Demand side shock
micro and macro impacts of decreased government spending and increased taxes
risk of income inequality
eval points for budget surplus
Need?
Debt/GDP rising?
policy used
stage of the economic cycle
what is monetary policy
changes to interest rates, the money supply and the exchange rate by the central bank in order to influence AD
expansionary monetary policy (increase AD)
contractionary monetary policy (decrease AD)
examples of expansionary monetary policy, show on diagram
increase inflation
increase growth
reduce unemployment
https://www.youtube.com/watch?v=uBaTPugw3M4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=38
examples of contractionary monetary policy, show on diagram
reduce inflation
prevent asset/credit bubbles
reduce excess debt and promote saving
reduce current account deficit
https://www.youtube.com/watch?v=uBaTPugw3M4&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=38
what are the cons of expansionary monetary policy
demand pull inflation
current account deficit
these are both tradeoffs
liquidity trap -> interest rates have a lower bound
negative impact on savers ->
evaluation points of expansionary monetary policy
size of the output gap
consumer confidence
business confidence
banks willingness to lend/pass on the full cut
size of the rate of cut
https://www.youtube.com/watch?v=leHUzW04iZ0&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=39
https://www.youtube.com/watch?v=leHUzW04iZ0&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=39
what are supply side policies
policies designed to increase the productive capacity of the economy, shifting LAS to the right
name interventionist supply side policies
Government spending on education/training
government spending on infrastructure
subsidies to firms to promote investment
https://www.youtube.com/watch?v=PvfdPfEd-gk&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=40
https://www.youtube.com/watch?v=PvfdPfEd-gk&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=40
what are the two types of policies to increase growth
short run growth
long run growth
short run growth. draw graph
if economy has low AD e.g. recession, lots of spare capacity in economy
therefore need to increase growth via a boost in AD
can be done using expansionary fiscal policy/monetary policy
https://www.youtube.com/watch?v=y944DbL0vMA&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=41
evaluation of short run growth
conflict of objectives
gov finances
consumer/business confidence
time lags
long run growth, draw graph
supply side policies
interventionist or market based
https://www.youtube.com/watch?v=y944DbL0vMA&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=41
evaluation of long run growth
type of growth
strong, sustained, sustainable growth
what is cyclical unemployment and how could it be reduced, draw a graph for it
expansionary fiscal, monetary policy
https://www.youtube.com/watch?v=0QKb_b2WGdU&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=42
evaluation of cyclical unemployment
conflict of objectives
government finances
consumer/business confidence
time lags
what is real wage unemployment and how could it be reduced, draw a graph for it
reduce minimum wages
reduce strength of trade unions
eval of real wage unemployment
impact on workers
income inequality
what is structural unemployment and how could it be reduced
unemployment based on time of year or economic climate
interventionist supply side policy
market based supply side policy
what is frictional unemployment and how could it be reduced
unemployment when between jobs
interventionist supply side policies
market based supply side policies
policies to reduce demand pull inflation, draw a graph for it
contractionary monetary/fiscal policy
policies to reduce cost push inflation, draw a graph for it
implement/reduce inflation target
reduce VAT/ Subsidies to firms
intervene in FOREX markets to strengthen the exchange rate
policies to reduce high long term inflation, draw a graph for it
supply side policies e.g. interventionist or market based supply side policies
evaluation points for policies to reduce demand pull inflation
conflict of objectives
impact on investment
impact of the indebted
strong exchange rate + current account deficit
evaluation for high long term inflation rates policies to reduce inflation
no guarantee of success
cost
time lags
policies to rectify a current account deficit
https://www.youtube.com/watch?v=2IcRbSQc9WM&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=44
what are the pros of contractionary fiscal policy (austerity)
confidence in government finances by reducing budget deficits etc. or getting a budget surplus -> translates to improved credit ratings on government bonds as they are seen as a less risky borrower -> government can issue lower coupon rates over time making it easier and cheaper for governments to borrow over time and e.g. fund public services
can attract inward FDI -> foreign firms more likely to invest into the country where gov finances are under control -> good for SR and LR growth
greater flexibility with fiscal policy -> e.g. budget deficit is low or budget surplus is being run, national debt is low -> governments can operate within their fiscal rules -> allowing them space for fiscal policy whenever its needed e.g. emergency funding of public services
what are the cons of a contractionary fiscal policy
can shock the economy into a deep recession -> by reducing AD -> lower growth and higher unemployment
lower spending on infrastructure e.g. education, healthcare, public transport -> can harm living standards for people who rely on these things
lower incentive for economically inactive people to join the workforce -> lower incentive to be entrepreneurial -> greater incentive for people to leave the country
what is a market based supply side policy and name the different ones
aim to reduce the role of government in the economy, take away government from the functioning of markets
tax reform:
Lower income tax -> incentive for more people to enter the labour force -> increases the quantity of labour and boosts LRAS
lower corporation tax -> more retained profits => use the profits to invest -> increase the quantity and quality of capital
labour market reform:
reduction in benefits -> economically inactive labour incentivised to join the market to find work
reduce min wages -> reduce costs for businesses -> increase productive efficiency
reduce trade union power -> reduce costs for businesses -> increase productive efficiency
competition policy:
privatisation ->
deregulation ->
trade liberalisation -> reduction on tariffs
how to evaluate using output gaps
when AD shifts right -> level of growth increases -> unemployment will decrease as labour is derived demand -> rise in demand from inflation or worsening trade position as exports become more competitive
however,
https://www.youtube.com/watch?v=-es6BW0ytdg&list=PLWeicFreBUYDlaLppnRTZpwgBASflf4lU&index=32
what does liberalisation mean
removing barriers to entry or tariffs
anticipated deflation
IT IS DANGEROUS
deflationary spiral -> people don’t want to spend as the good may be cheaper in future so hold off -> decreased revenue for firms -> decreased derived demand so reduction in employment + economic growth in LR
positive real interest rates -> people prefer to save when there is anticipated deflation as the value of goods would decrease so over time their money will have more value if saved -> decreased revenue for firms -> decreased derived demand for labour -> increased unemployment
increases real value of debt -> profits for business + incomes for workers will be falling at the same time -> as prices are falling firms making less revenue therefore less pay for workers aswell -> however the lower incomes may be fine as they match the lower prices in the economy
