Spare capacity Flashcards
1
Q
What is spare capacity ?
A
The extent to which an economy is operating below its productive potential
2
Q
What is the meaning of spare capacity ?
A
There are unemployed resources such as labor and capital
3
Q
What does spare capacity mean for businesses ?
A
Can increase output without raising prices because there is less pressure on wages and raw materials.
4
Q
What can spare capacity with businesses lead to ?
A
low inflation or even deflation as (AS) is elastic.
5
Q
What is the impact of spare capacity on interest rates ?
A
The central bank may lower interest rates to stimulate demand
6
Q
Evaluate this :
A
- Time Lag: Monetary policy (changing interest rates) takes time to affect inflation and demand
- Liquidity Trap: In periods of deep recession, even very low interest rates may not boost demand
7
Q
What is an Output Gap ?
A
Difference between actual level of GDP and productive potential of the economy.
