High growth, low unemployment, low inflation (not zero), balanced current account
100
What happens during a boom
Output gap is narrowed or
Growth rate is greater than potential GDP growth
100
Explain the classical LRAS curve (completely)
An economy always produces at maximum potential regardless of price level because
all workers willing to work at the equilibrium rate will be employed
100
This leads to inflation
AD increases without a corresponding rise in AS
or an economy is working at full capacity
100
Why do we have economic policies? (2 reasons)
To support economic stability,
reduce uncertainty,
build consumer confidence,
smooth out fluctuations from the economic cycle
200
Two characteristics of short run growth
Actual increase in GDP,
Resources are used more efficiently,
Movement towards the PPF
200
Two reasons why long periods of unemployment are harmful
Loss of skills
Loss of human capital
Loss of productivity
200
Explain the Keynesian LRAS curve
An economy doesn't always produce at max capacity due to market failure. In recession, output can increase without raising wages/prices. Wages are sticky.
200
Labour is this kind of demand
Derived demand
200
Why is price stability important? (2 reasons)
Price is a signal about supply and demand in the economy
Inflation reduces buying power
Prices affect confidence towards saving and investing
Prices affect international competitiveness
300
Two characteristics of long run growth
Potential productivity or capacity increases,
Increase in quantity of factors of production or LRAS,
Outward shift of PPF
300
This is the accelerator
The level of investment depends on the rate of change of national income; an increase the rate of economic growth will have a corresponding larger increase in the level of investment.
300
How you increase quantity of labour
Immigration, population growth, increased labour force participation rate
300
This is why growth can lead to a current account deficit
More imports are needed to satisfy rising AD
300
What is the Golden Rule of Fiscal Policy
The government will only borrow to pay for investment, not for current expenditure
400
Two properties of a positive output gap
Actual output is greater than potential output
No spare capacity
Always leads to inflation
400
This is the multiplier
An increase in any component of AD (injection) will lead to an even greater change in national income
400
How you increase quality of labour
Training and education
400
These three types of tax revenue increase during a boom
income tax
corporate tax
VAT
400
Why is forecasting by the central bank important?
Adjusting interest rates has a 2 year time lag before taking effect
500
Short run growth usually results from changes in this (with 2 examples)
Costs of production (wages, raw materials, taxes)
500
This is a major lag behind the economic cycle
Stocks of goods, or inventories
500
How you improve quantity and quality of capital (2 things)
Investment, innovation or technology
500
Explain fiscal policy austerity
Lower government spending and higher tax rates are put in place to balance the budget
500
How can countries stay internationally competitive in terms of supply side policy? (2 reasons)
Keep low production costs
Increase productivity
Keep a low exchange rate
Provide quality products and services