Macroeconomics Flashcards
multiplier process
AD↑–> firms experience an unplanned drop in inventory –> raise production in the next cycle –> dd for factor inputs↑, e.g. more labour supplied by HH employed
more labour employed –> more factor Y paid out –> further↑in CE –> further income generation for subsequent parties within the economy
Y↑–> withdrawals↑[M + T + S] –> multiplier process stops when the initial↑in AE = total↑in withdrawals
overall, real NY↑MTP
circular flow of income
illustrates the rs between different economic units [households, firms, govt, financial institutions and the external economy] + how an economy arrives at a certain eqm level of Q, E and Y
Y flows in a circle –> HH’s Y –> CE on firms’ gds and svcs –> firms’ revenue –> factor income [back to HH]
discuss whether surpluses are beneficial to the SG economy
CA surplus [good]
- AD↑–> improve goals, e.g. EG and UN
CA surplus [bad]
- AD↑–> dd pull inflation
- low M is undesirable –> less consumer + capital gds –> mSOL↓[esp if M is produced at lower opp cost by TP] + PC rises at slower rate and hence future SOL will improve less quickly
- retaliation
factors to consider
- SOE: bad during boom, good during recession
- NOE: large impact on small and open economies with small domestic dd
- root cause: if good reasons, e.g. X is competitive + low relative inflation –> indication of good economic performance
budget surplus [bad]
- G is lower –> AD is falling –> EG and UN
- T is higher –> high income tax leads to lower disposable income and incentive to work + high corporate tax leads to lower after-tax profits and attractiveness to FDI –> C and I↓+ PEG is compromised due to less tech transfers
budget surplus [good]
- AD is low –> less dd pull inflation
- govt is in a better position to address specific challenges experienced by the economy, e.g. ageing population –> spend more on HC
factors to consider
- SOE: desirable during boom –> reduce inflationary pressures + negative effect of falling G is less significant since other components may be rising
- SOE: lots of global uncertainty with Brexit, trade war, slowing down of Chinese economy –> surplus allows SG to better address potential external shocks better via exp FP or Jobs Credit Scheme
- root cause: in SG, budget surplus is a result of strong EG –> high income tax revenue –> indication of good economic performance rather than under-spending on HC, edu or infrastructure
- tax rates in SG very low by global standards –> sign of strong global competitiveness
benefits of EG are
improves mSOL
- if↑in EG >↑in pop –> real GDP per capital↑
improves budget position
- greater financial ability to address specific problems in the economy via fp [during a recession] and ssp [to tackle ageing population / low productivity]
achieves other macro goals
- UN↓
improves business confidence
- exp ROR↑–> I↑–> AD / AS benefits
trade-offs of EG are
dd pull inflation
- not sustained
SUE + WIG
- not inclusive
negative externalities
- not sustainable
determinants of sustainable and inclusive EG are
real
- ↑in real GDP
- AD↑+ k process
- policies –> exp ddm
- event –> C rise due to better outlook / X rise due to TP’s Y↑
potential
- ↑in PC
- AS rise + improvement in quality and quantity of capital / labour
- policies –> ssp
- event –> tech transfer from FDI / inflow of foreign workers
sustainable
- efficient use of resources –> will not be depleted –> economy can continue to grow in the LR + SOL of future generations will not be compromised
- policies –> tax: emission + RnD: clean technologies + legislation: quotas
inclusive
- benefits of EG is extended to all and not just limited to the rich minority –> all can afford necessities to attain basic SOL
- policies –> income redistribution
measurements of sustainable and inclusive growth are
real
- real GDP growth rates
potential
- no indicator
sustained
- real GDP growth rate + inflation
sustainable
- PSI + carbon emission per capita
inclusive
- Gini coefficient
budget deficit is a concern because
budget deficit: G > T
dd pull inflation
- G↑–> AD↑–> if the economy is nearing or at full employment, supply bottlenecks –>↑in GPL due to↑in AD would be sig
crowding out effect
- govt borrows to fund G –> dd for loanable funds↑–> ir↑–>↓in C [higher rate of returns on savings] and I [lower after-tax returns on planned investments]
lower tax revenue
- less ability to spend on fp [during recessions] and ssp [to deal with challenges such as low productivity / ageing workforce]
pessimism
- HH’s and firms’ outlook may be poorer due to increasing concerns about govt’s ability to pay debt –> uncertainty –> lower C and I
the level of FDI is determined by
cost considerations
- wages
- productivity
- corporate tax
- infrastructure
revenue considerations
- SOE of host country
- access to other big markets via FTA
others
- price stability
whether exp fp can help bring about sustained EG depends on
NOE
- Sg: small and open –> growth is more dependent on external sector compared to domestic sector –> preference for policies that target these external sectors
size of k
- SG: high MPS [culture of thrift + compulsory savings scheme] and MPM [resource scarce] –> MPW is high –> small multiplier –> real NY ↑ LTP than the initial injection in spending –> limits the effectiveness of exp fp
budget position
- availability of reserves
impact on AS
- depends on what G is spent on –> if G with ss intent, (eg) retraining –> AS shifts outwards in LR –> sustained EG
factors that policy makers consider when addressing price stability include
root cause
- external vs domestic
- dd pull vs cost push
NOE
- exr or mp
responsiveness to increase tax/ir esp during boom
UC
- decreasing AD too much will worsen other goals
others
- inflation [con] vs deflation [exp]
limitations of exr policy to address inflation are
UC
- exr appreciation –> AD↑–> worsens EG, UN, BOP
root cause
- exr deals with external sources, not domestic
- rising C: con fp
- rising wages: ssp
limitations of exr policy to address a global recession are
UC
- exr depreciation –> P of M↑–> imported inflation –> extent of depreciation must be limited
TP’s responsiveness
- poor due to falling Y and poorer outlook
what are the policies to bring about sustainable and inclusive EG
ddm
ssp
environment policies
- carbon emission tax
- Rnd on clean tech
- quotas
income gap policies
- GST vouchers
- Workfare Income Supplement (WIS) –> supplements lower-wage workers’ incomes and retirement savings through cash payments and CPF contributions
- Community Health Assist Scheme (CHAS) –> subsidizes medical and dental care at participating gp and dental clinics
- Financial Assistance Scheme (FAS) –> provides financial help for education fees and other school expenses
what are the policies to increase global competitiveness
X
- exr depreciation [SR, and if during recession]
- ssp [LR] –> process and product innovation
FDI
- corporate tax
- infrastructure
- price stability
- ensuring workforce is skilled and productive
what are the policies to help reduce vulnerability to external shocks
dd shocks [trade war, global recession]
- exp ddm
- exr appreciation
ss shocks [nat disasters]
- diversify
- X: increase no of X destination via FTA + Rnd to develop CA in a wider range of sectors
- M: increase no of M sources via FTA + develop domestic substitutes to reduce reliance on M
automatic fiscal stabilizers reduce business cycle fluctuations and achieve inclusive growth by
automatic stabilizers
- income taxes and welfare benefits are fiscal structures that are primarily used to reduce income inequality by
redistributing income from the rich the poor, i.e. to promote inclusive growth, due to their progressive nature
- by raising the progressiveness of such fiscal structures, the impact on promoting inclusive growth and reducing business cycle fluctuations will be enhanced
recession
- progressive tax system: Y↓–> more HH fall into lower tax brackets –>↓in tax payments would be faster than↓in Y [pay proportionately less taxes] –> lower extent of fall in Yd –> smaller↓in C and AD
- UN benefits: with higher UN, more HH will be eligible to receive UN benefits –>↓in Yd is reduced with these transfer payments –> smaller↓in C and AD
- ↓in withdrawals and↑in injections have exp effects on the economy –> reduces the severity of the economic downturn
boom
- progressive tax system: Y↑–> more HH rise into higher tax brackets –>↑in tax payments would be faster than↑in Y [pay proportionately more taxes] –> lower extent of↑in Yd –> smaller↑in C and AD
- UN benefits: with lower UN, less HH will be eligible to receive UN benefits –> lower Yd from these transfer payments –> smaller↑in C and AD
- ↑in withdrawals and↓in injections have con effects on the economy –> brings down inflationary pressures
other than ddm, the govt can address unemployment in the SR by using
job credit scheme
- SR cost cutting measure –> lower cost for firms –> less incentive to retrench workers [AS shifts downwards]
- not limited by the size of k unlike ddm
- dependent on responsiveness of firms
- does not address the root cause of falling AD –> ddm is still necessary
other than spending on retraining and infrastructure, the govt can also boost productivity by
ssp [market-oriented]
- increase competition –> firms have more incentive to engage in process innovation and product innovation
evaluation of policies to boost EG
mp
- interest elasticity of dd for money [liquidity preference] –> the more interest elastic the dd for money, the smaller the↓in ir given an increase in the ss of money –> less sig impact on I and AD, i.e. mp has a weak effect on the economy
- interest elasticity of MEI –> the more interest inelastic the MEI, the smaller the change in I given a↓in ir
- economic outlook –> expected ROR [shift of MEI curve]
- size of multiplier –> the smaller the multiplier, the weaker is the effect on NY and EG given a change in I and AD
- openness to capital flows –> the more open an economy is to capital flows, the less able it is to control the ss of money / ir –> less able to use mp
fp
- crowding out effect
- size of multiplier
the possible causes of deflation are
decrease in AD [with diagram]
- C: lower consumer confidence + higher interest rates / income tax
- I: lower investor confidence + higher interest rates / corporate tax
- G: austerity measures
- (X-M): recession in TP countries + exr appreciation
increase in AS [with diagram]
- SR: lower unit COP [lower P of FOP + higher productivity of workers]
- LR: QQ of FOP
