Macroeconomics Booklet Six - Y13 Flashcards
- fiscal policy - monetary policy - unemployment - the phillips curve
Crowding out
A phenomenon whereby increased public sector spending displaces spending by the private sector, either by driving up the prices of factors of production or by increasing the cost of borrowing.
Cyclical budget deficit
A budget deficit that is caused by the phase of the economic cycle that an economy is in (i.e. it will appear during a recession and disappear with economic growth)
Fiscal drag
The tendency of the tax system to withdraw more from a growing economy e.g. through bracket creep as rising incomes see more taxpayers drawn into higher tax brackets.
Hysteresis
A reduction in the long-run productive capacity of an economy as a result of skills lost during unemployment. It can be used to any long-lasting impact of a negative economic shock.
Involuntary unemployment
Where workers are unable to find a job due to circumstances beyond their control, usually associated with cyclical unemployment
Liquidity trap
A situation in which conventional monetary policy begins to lose traction – in spite of low interest rates, economic agents prefer to save than spend, usually due to low business and consumer confidence.
Money illusion
The idea that economic agents do not recognise that the purchasing power of money will fall over time (a tendency to think in nominal rather than real terms).
Natural rate of unemployment (NRU)
The rate of unemployment when the aggregate labour market is in equilibrium – the demand for and supply of labour are equal. Mostly voluntary (especially frictional) unemployment as workers look for better pay or conditions.
Non-accelerating inflation rate of unemployment (NAIRU)
The rate of unemployment below which inflation would be expected to increase.
Office for Budget Responsibility
An independent body set up to scrutinise the government’s fiscal policy and produce independent economic forecasts
Paradox of thrift
A scenario where an increase in saving reduces aggregate demand and therefore real national output and income (reducing people’s ability to save).
Real interest rate
The cost of borrowing and reward for saving, expressed in percentage terms, corrected for inflation. Real interest rate = nominal interest rate – rate of inflation
Ricardian equivalence
The proposition that an increase in government spending funded by borrowing will be offset by a fall in consumption as households smooth their expenditure in anticipation of later tax increases to repay the debt.
Structural budget deficit
A budget deficit that persists irrespective of the phase of the economic cycle due to a fundamental imbalance in government receipts and expenditure (i.e. the government continues to operate with a budget deficit even during an economic boom).
Voluntary unemployment
Where there are vacancies available, but workers do not take them as they are holding out for better pay or conditions.
