All Flashcards
How does government spending affect GDP during a recession?
Increased government spending can stimulate aggregate demand and increase GDP during a recession.
How do tax cuts affect consumer spending during a contraction?
Tax cuts can increase disposable income, leading to increased consumer spending during a contraction.
What is the impact of contractionary monetary policy on inflation?
Contractionary monetary policy (e.g., raising interest rates) can reduce inflation by decreasing aggregate demand.
How does expansionary monetary policy affect investment?
Expansionary monetary policy (e.g., lowering interest rates) can encourage investment by making borrowing cheaper.
What is the effect of unemployment benefits on aggregate demand during a recession?
Unemployment benefits help maintain aggregate demand by providing income to those who have lost their jobs.
How can fiscal policy be used to address an inflationary gap?
Fiscal policy can reduce government spending or increase taxes to decrease aggregate demand and close an inflationary gap.
How does monetary policy affect the exchange rate?
Higher interest rates (contractionary monetary policy) can increase the exchange rate, while lower interest rates (expansionary monetary policy) can decrease it.
What is the impact of supply-side policies on long-term economic growth?
Supply-side policies (e.g., tax cuts, deregulation) aim to increase long-term economic growth by increasing potential output.
How do automatic stabilizers affect the business cycle?
Automatic stabilizers (e.g., unemployment benefits, progressive taxation) help to smooth out the business cycle by automatically increasing spending during recessions and decreasing spending during expansions.
What are the potential drawbacks of using fiscal policy to stimulate the economy?
Potential drawbacks include time lags, crowding out of private investment, and increased government debt.
How does low unemployment affect inflation?
Low unemployment can lead to increased wage demands, pushing prices and inflation higher.
What is the effect of high inflation on purchasing power?
High inflation decreases purchasing power, meaning each dollar buys fewer goods and services.
How does increasing GDP impact unemployment?
Increasing GDP typically leads to lower unemployment as businesses hire more workers to meet demand.
How does a recession impact consumer spending?
A recession typically leads to decreased consumer spending due to job losses and economic uncertainty.
How does expansion affect business investment?
Expansion encourages business investment due to increased demand and profit opportunities.
How does the peak of the business cycle relate to future economic activity?
The peak often precedes a slowdown or contraction as the economy can't sustain maximum output indefinitely.
How does the trough of the business cycle relate to future economic activity?
The trough often precedes an expansion as the economy begins to recover and grow again.
How does an inflationary gap relate to the expansion phase?
An inflationary gap, where actual output exceeds potential output, is characteristic of the expansion phase, leading to rising prices.
How does high unemployment affect aggregate demand?
High unemployment decreases aggregate demand as fewer people have income to spend, leading to lower consumption.
How does the business cycle affect government revenue?
Government revenue typically increases during expansions due to higher tax collections and decreases during contractions due to lower tax collections and increased welfare spending.
What is GDP?
The total value of all goods and services produced within a country's borders.
What is unemployment?
The percentage of the labor force actively seeking work but unable to find it.
What is inflation?
The rate at which the general level of prices for goods and services is rising.
Define the business cycle.
Fluctuations in economic activity, with phases of expansion and contraction.
What is the expansion phase?
A period of economic growth characterized by increasing GDP and low unemployment.
What is the peak of the business cycle?
The highest point of economic growth, representing maximum output.
What is the contraction phase?
A period of economic decline characterized by decreasing GDP and high unemployment.
What is a recession?
Two consecutive quarters (6 months) of negative GDP growth.
What is a depression?
A severe and prolonged recession.
What is the trough of the business cycle?
The lowest point of economic activity.