BUSINESS CYCLE / POLICIES

Question 1

What are the 7 macroeconomic objectives

Answer 1

inflation rate of 2% plus or minus 1%.

economic growth as measured by an increase in real GDP.

achieve full employment.

a current account equilibrium, whereby the inflows are equal to the outflows.

government spending equals tax revenue.

reduce inequality.

protect the environment.

Question 2

Describe the shape of the business cycle diagram

Answer 2

real gdp on y axis
time on x axis

Graph starts with a upward slope before shooting downwards, this cycle repeats as time increases

Question 3

What is the area between the Boom and following bust known as

Answer 3

Slowdown/slump

Question 4

What is the area between the bust and following boom known as

Answer 4

Recovery

Question 5

What is the definition of a recession

Answer 5

Two or more consecutive quarters of negative economic growth

Question 6

definition of: Boom

Answer 6

part of the business cycle where real GDP is at its highest.

Question 7

What does the trend line (potential trend gdp) of the boom bust cycle show

Answer 7

In the long run despite downward and upward spirals, real gdp is overall increasing

Question 8

What is a positive output gap

Answer 8

When actual gdp is above trend potential gdp, economy is producing above its potential

Question 9

What is a negative output gap

Answer 9

when actual gdp is below trend potential gdp, economy is producing below its potential

Question 10

the definition of: Potential Trend GDP

Answer 10

The sustainable rate of GDP growth caused by improvements in productive capacity overtime.

Question 11

what is meant by the business cycle?

Answer 11

Fluctuations in real GDP over time

Question 12

How do you represent an neoclassical output gap on an ad-as diagram

Answer 12

Using neoclassical lras, sras and ad, for negative output gap intersection of lras and ad leads to a greater real gdp than intersection of sras and ad

Question 13

What do neoclassical economists believe about long term and short term output gaps

Answer 13

Short run output gaps are possible but long run output gaps are impossible.

Question 14

how do you represent a long run output gap

Answer 14

keynesian lras curve + ad curve, on the horizontal part of the lras curve, draw arrow to show difference in maximum potential output and actual output

Question 15

What are the characteristics of a boom (5)

Answer 15

High animal spirits.
High economic growth
demand pull inflation
low unemployment
reduced budget deficit

Question 16

Why might a boom lead to reduced budget deficit

Answer 16

Less unemployed people, more income tax revenue, less benefits spending

Gov revenue increases while gov spending falls

Question 17

What are the characteristics of a bust (5)

Answer 17

Low animal spirits decrease consumption and investment.

Low economic growth measured by a decrease in real GDP.

Low inflation or deflation as the price level decreases.

High unemployment as firms demand fewer workers.

A worsened budget as government spending increases and tax revenue decreases.

Question 18

What are the two types of economic policy

Answer 18

demand side policy
supply side policy

Question 19

main impact of a decrease in income tax?

Answer 19

Increase in AD

Question 20

what is meant by supply side policies

Answer 20

Government policies which aim to influence aggregate supply.

Question 21

What is meant by demand side policies

Answer 21

Government policies which aim to influence aggregate demand.

Question 22

Who manages supply side policies?

Answer 22

The government

Question 23

What are the two types of demand side policies

Answer 23

fiscal policy - managed by government

monetary policy - managed by bank of england

Question 24

What fiscal policy options would the government choose to pursue to get the economy out of a recession

Answer 24

Decrease taxes and increase government spending, worsening the budget deficit

Question 25

What is expansionary/loose fiscal policy

Answer 25

when the government reduces taxes and increases government spending expanding the circular flow of income

Question 26

What is contractionary fiscal policy

Answer 26

when the government increases taxes and reduced government spending in order to improve budget deficit contracting the circular flow of income

Question 27

what is fiscal policy

Answer 27

When the government changes its taxes and spendings to influence the economy

Question 28

What are benefits

Answer 28

payments made by the governments to low income or unemployed people

Question 29

one disadvantage and one advantage of increasing benefits.

Answer 29

Increasing benefits means more money is transferred to unemployed workers. This will increase their consumption, which will increase AD. Also, increasing benefits will help to reduce income inequality. benefits trap.

Question 30

What is meant by the benefits trap

Answer 30

if benefits are too high, there is a significant disincentive for unemployed people to find a job, because they may earn more by claiming benefits.

Question 31

one disadvantage and one advantage of the government reducing spending on benefits.

Answer 31

budget deficit will improve as the government is paying out less. poor households will have less to spend, so consumption will fall, which will decrease AD. Also, income inequality will worsen as the poor get poorer.

Question 32

What is meant by crowding out

Answer 32

When the government increases its spending, to build a hospital or railway, it needs to borrow money and also needs more land, labour and capital. This increases costs for firms reducing their supply shifting sras to the left

Question 33

Why might interest rates rise as the government increases its demand for borrowed money, land, labour and capital?

Answer 33

When the government competes with businesses for resources (land, labor, and capital), wages and prices for these inputs rise. Higher costs lead to inflationary pressures, which central banks may counteract by raising interest rates to control inflation.

Question 34

what is meant by infrastructure

Answer 34

Items needed for businesses to operate such as roads and telecommunications networks.

Question 35

What is contractionary monetary policy

Answer 35

Contractionary monetary policy is a type of economic policy used by central banks to reduce inflation and slow down an overheating economy. It involves decreasing the money supply and increasing interest rates to curb excessive spending and borrowing.

Question 36

What is expansionary monetary policy

Answer 36

Expansionary monetary policy is a type of economic policy used by central banks to stimulate economic growth, especially during periods of recession or economic slowdown. It aims to increase the money supply and encourage borrowing and spending. typically involves lowering interest rates

Question 37

What are the tools the bank of england can use in monetary policy

Answer 37

Changing base interest rates Quantitative easing

Question 38

What is the impact of an increase in the interest rate on investment.

Answer 38

An increase in the interest rate means that firms will have more re- payments when they borrow. This will lead to a reduction in investment which is a components of aggregate demand. A reduction in AD should decrease the price level and reduce the rate of inflation

Question 39

What is quantitative easing

Answer 39

Quantitative easing is when the central bank buys financial assets such as bonds from high street banks. This increases the money supply for high street banks, which increases the amount of money that banks can lend.

Question 40

disadvantage of qe

Answer 40

high levels of qe shoot up the money supply may lead to hyperinflation

Question 41

what mistakes did the us government make that caused the crash of the stock market to led to the great depression

Answer 41

Restrictive trade policy contractionary fiscal policy

Question 42

What 3 policies did roosevelt use to lift usa out of the great depression

Answer 42

new deal - expansionary fiscal policy removed trade restrictions cheaper imports got rid of gold standard allowing interest rate manipulation and changing money supply

Question 43

What are the two types of supply side policies

Answer 43

there is interventionist policy where the government is actively involved in increasing aggregate supply Second, there is market based where the government allows the market to operate freely.

Question 44

Which type of policy is infrastructure spending an example of?

Answer 44

interventionist ssp

Question 45

What type of supply-side policy is reducing corporation tax an example of?

Answer 45

Market based ssp

Question 46

one advantage and one disadvantage of reducing the national minimum wage.

Answer 46

a decrease in wage costs will decrease the cost of production for firms, which will increase short run aggregate supply. a reduction in the minimum wage will reduce disposable income for many households. This will reduce consumption and decrease aggregate demand, which will lead to a reduction in real GDP.

Question 47

What is meant by deregulation

Answer 47

When regulations are removed to lower barriers to entry

Question 48

Explain the impact of a reduction in income tax on aggregate supply.

Answer 48

reducing income tax means that workers get to keep more of their earnings and so disposable income increases. This is likely to increase the number of hours they choose to work However, an increase in disposable income could cause some workers to decrease their labour supply as they now need to work less to earn the same amount of money

Question 49

What is monetary policy

Answer 49

When the central bank changes the base interest rate or the money supply in order to influence aggregate demand within an economy.

Question 50

What is the base interest rate

Answer 50

The interest rate, set by the Bank of England, showing the rate at which they will lend money to highstreet banks.

Question 51

What does the phillips curve show

Answer 51

Tradeoff between inflation and unemployment

Question 52

Describe the tradeoff between unemployment and inflation

Answer 52

When unemployment is low, firms compete to hire the few remaining workers, increasing the wage that they are willing to pay. So wages increase, and firms will then increase their prices, so that they can make a profit as unemployment decreases, the price level increases, which, as we know, is inflation

Question 53

Describe the shape of the phillips curve

Answer 53

downward sloping, starting very steep and then becoming much flatter: X axis is unemployment% Y axis is inflation rate

Question 54

What can be said about the relationship between contractionary fiscal policy and supply side policies

Answer 54

Contractionary fiscal policy is required to fund supply side policies There is a conflict between contractionary fiscal policy and supply side policies

Question 55

How can monetary policy limit the effectiveness of fiscal policy in boosting economic growth?

Answer 55

Expansionary fiscal policy creates inflationary pressure in the economy. Therefore, policy makers respond by using monetary policy to increase interest rates. This holds back economic growth and creates a policy conflict between fiscal and monetary policies.

Question 56

What is meant by policy paralysis

Answer 56

Policy paralysis refers to a situation where a government or decision-making body is unable or unwilling to make decisions or implement policies effectively