OJA 4 - Economic Cycle, Fiscal Policy Flashcards
What is an economic cycle?
It shows the fluctuations in an economic activity over time, represented by change of GDP
GDP is represented as a curve that is oscillating around the potentional product, the narrower the curve the better
The fluctuatians happen due to material shortage or when prices reach their peak and they are so high that the demand declines that means that there has to be a change
Economic cycle is fractual, that means it tends to repeat itself, so we can predict what will happen, it has 6 stages; expansion, peak, recession, depression, trough and recovery
Explain each stage of an economic cycle
Expansion = GDP rises, the production rises, employment rises, sales rises, income rises, however so the prices
Peak = GDP stops growing, prices reach their highest levels
Recession = due to high prices, demand starts to drop, so does the production, therefore unemployment rises - prices soon starts to drop
Depression = usually take 6 months, high unemployment, production plummets, it is hard to get loans, bankrupcies
Through = a period where an economic activity is bottoming before a rise
Recovery = due to low prices, demand starts to rise, so does the production and employment
- it is the end of one economic cycle
What is Okun’s law?
It claims that there is mutual relationship between unemployment and GDP —> if unemployment falls by 1%, GDP rises by 3%
What is a fiscal policy?
Goverment adjusting the economy
They are expanding or contracting the economy by increasing or lowering their macroeconomics tools (governments spending, tax rates) in order to avoid long recession
What two forms of fiscal policy do we have?
Expansionary FP
Contractionary FP
When Expansionary FP is employed?
It is employed to speed up the economy by increasing government spending and lowering tax rates
When Contractionary FP is employed?
It is employed to slow down the economy by lowering government spending and increasing tax rates
What is a GDP per capita?
It shows a country’s economic product value per person, it is calculated by dividing the GDP of a country by its population
One if the best measures of prosperity
What is a human development index (HDI)?
It is an index created to rank the development of countries by measuring the achievements of the inhabitants
It compares life expectancy, literacy and standard of living
What are tax havens?
These are offshore countries that offer little/no tax liablity to companies in a politically and economically static environment
They don’t require residency or business presence
e.g. UK, Ireland, the Netherlands, Singapore
What is debt?
It is the accumulation of annual budget deficits
