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 does a downward sloping line on a GDP graph indicate?
A downward sloping line indicates a contraction or recession in the economy.
What does an upward sloping line on an unemployment rate graph indicate?
An upward sloping line indicates increasing unemployment, often during a contraction.
What does a peak on a GDP graph represent?
A peak represents the highest level of economic output before a slowdown or recession.
What does a trough on an unemployment rate graph represent?
A trough represents the lowest level of unemployment before an expansion.
How do you identify a recession on a GDP graph?
A recession is identified by two consecutive quarters of negative GDP growth.
How does the growth trend line relate to actual GDP on a graph?
The growth trend line represents the ideal, sustainable growth rate, while actual GDP fluctuates around it.
What does a steep upward slope on a GDP graph indicate?
A steep upward slope indicates rapid economic growth during an expansion.
What does a steep downward slope on an unemployment graph indicate?
A steep downward slope indicates a rapid decrease in unemployment, usually during a strong expansion.
How can you identify an inflationary gap using a graph?
An inflationary gap is shown when actual output (GDP) is above the potential output (growth trend line).
What does the area between the growth trend line and the actual GDP line represent?
The area represents the output gap, which can be either inflationary (above the line) or recessionary (below the line).