Macroeconomics knowledge Flashcards
ways to measure national output
expenditure approach, income approach, output approach
expenditure approach
consumption spending, investment spending, government spending, net exports
GDP vs. GNI
everything produced within the country vs. total income received by residents of the country regardless of where the money comes from
determinants of AD
changes in consumer confidence, interest rates, wealth, income/business taxes, changes in household/corporate indebtedness, expectations of future prices, improvements in technology, legal changes, changes in political/economic priorities, changes in national income abroad, changes in exchange rates, changes in trade policies
determinants of SRAS
changes in wages, non-labour resource prices, indirect taxes, subsidies, and supply shocks
Keynesian economic model
economy cannot move to the long run when experiencing a deflationary gap due to inflexible wages and other resource prices
determinants of AS/LRAS
increased quantities of factors of production, improvements in quality of factors of production, improvements in technology, increased efficiency, institutional changes, reduction in the natural rate of unemployment
structural unemployment causes
demand for particular labour skill, geographical location of jobs, market rigidities (minimum wage legislation, labour unions, employment protection, unemployment benefits)
costs of unemployment
loss of real output, income for unemployed, and tax revenue for the government, costs to government of unemployment benefits, larger budget deficit/smaller surplus, more unequal distribution of income, decreased employability of unemployed people
costs of inflation
redistribution effects, uncertainty, effects on saving, decreased international competitiveness, hindering economic growth, unequally distributed social costs
redistribution effects of inflation
lenders, savers, and receivers of fixed-income lose, borrowers, payers of fixed income gain)
costs of deflation
increase in the real value of debt, uncertainty, deferred consumption, risk of bankruptcies, ineffectiveness of policies dealing with deflation
goals of monetary policy
low and stable inflation, low unemployment, reduce business cycle fluctuations, promote a stable economic environment for long term growth, external balance
tools of monetary policy
open market operations, minimum reserve requirements, central banks minimum lending rate, quantitative easing
constraints of monetary policy
possible infectiveness in recession (interest rates cannot fall when approaching zero, low consumer and producer confidence, banks may be fearful to lend), may be inflationary, cannot deal with cost-push inflation
strengths of monetary policy
relatively short time lags, flexible policy (interest rates can be reversed and changed often according to needs), interest rates changes can be incremental, central bank independence, limited political constraints, no budget deficits or debt, no crowding out
goals of fiscal policy
low and stable inflation, low unemployment, reduce business cycle fluctuations, promote a stable economic environment for long term growth, external balance, equitable distribution of income
constraints of fiscal policy
problem of time lags, political constraints, creates government debt, tax cuts may be ineffective in recession in increasing AD, inability to fine-tune the economy, crowding out, can be inflationary, cannot deal with cost-push inflation
strengths of fiscal policy
pulling the economy out of deep recession, ability to target sectors of the economy, direct impact of government spending on AD, ability to affect potential output, dealing with rapid and escalating inflation, automatic stabilisers (progressive income taxes, unemployment benefits)
goals of supply-side policies
promote long term growth by increasing the productive capacity of the economy, improve competition and efficiency, reduce costs of labour and unemployment through greater labour market flexibility, increase incentives of firms to invest in innovation by lowering costs of production, reduce inflation to improve international competitiveness
encouraging competition
privatisation, deregulation, contracting out to the private sector, anti-monopoly regulation, trade liberalisation
incentive related policies
lowering personal income/business taxes, lowering taxes on capital gains and interest income
labour market reforms
abolishing minimum wage legislation, reducing unemployment benefits, reducing job security, weakening the power of labour unions
interventionist policies
investment in human capital (training and education, improved health care and access to it), investment in new technology, investment in infrastructure, industrial policies (support for small firms, enterprises, and newly emerging industries)
constraints of market-based supply-side policies
problem of time lags, possible unfavourable impact on unemployment, negative impact on the government budget, possible negative impact on the environment and on equity
constraints of interventionist supply-side policies
time lags, negative impact on government budget
strengths of market-based supply-side policies
improved resource allocation, may not burden government budget, ability to create employment, ability to reduce inflationary pressures
strenghts of interventionist supply-side policies
direct support of sectors important for growth, ability to create employment, ability to reduce inflationary pressures, possible positive impact on equity
Keynesian multiplier
change in the real GDP/initial change in expenditure, or 1/(1-MPC)
