2.6: Introduction to macroeconomic policy Flashcards
(19 cards)
what are the 6 key objectives of macroeconomic policy?
price stability - cpi 2%
sustainable gdp growth
falling unemployment
increased living standards
improved BoP
equity
what is a boom?
when real national output rises strongly at a rate faster than trend of growth rate
what are some characteristics of economic boom?
strong and rising level of aggregate demand - driven by C
rising employment and wages
rising demand for imported goods and services
rising tax revenues
increasing profits, shares, dividends etx
increased capacity utilisation - resultant inflation (overheating)
what is a recession?
a fall in level of real national output - period of negative economic growth
what are some of the characteristics of a recession?
declining AD
rising unemployment
sharp fall in business confidence
reduced inflationary pressure
lower interest rates from central banks
increased spending on welfare
what is the formula for AD?
AD = C + I + G + (X - M)
what is the accelerator effect?
capital investment linked positively to expected growth of consumer demand
what are animal spirits?
state of confidence or pessimism held by consumers and businesses
what is a demand shock?
an unexpected shock to one or more of the components of aggregate demand
what is a depression?
a severe recession which may lead to a prolonged downturn in the economy, where GDP falls by at least 10 per cent
What are double dip recessions?
when an economy goes into recession which may become a prolonged downturn in the economy and where GDP falls by at least 10 per cent
What are economic shocks?
unpredictable events like volatile prices for oil and gas
what is output gap?
difference between potential and actual real national income in an economy
what is a peak?
high point of the economic cycle beyond which a recession starts
how long is a recession?
at least 6 months
what is a trough?
low point of the economic cycle beyond which a recovery starts
what are the main causes of shifts in aggregate supply?
change in unit labour costs
change in other production costs
commodity prices
exchange rates
govt tax and subsidies
price of imports
describe the CoR for expansionary fiscal policy
govt cuts tax - disposable income increases - increase govt spending - households demand more goods and services - firms increase output so hire more workers - unemployment falls - AD increases - economy grows
describe the CoR for expansionary monetary policy
cut in interest rates - less incentive to save - greater incentive to spend - cost of borrowing falls so households with mortgages etc - increased disposable income - consumption increases - cheaper for firms to borrow - investment increases - increased AD
