econs
govt exp -> direct expenditure undertaken by the govt on goods and services
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transmission mechanism of QE
Central bank hopes that increase in money supply -> public will convert the excess money into physical assets by spending the excess money on goods and services -> increase in consumer spending, boosting AD and hence leading to real growth. Excess money may lead to the buying of foreign deposits resulting in a rise in supply of the local currency in the foreign exchange market, causing the local currency to depreciate. Depreciation will encourage exports and dampen imports, increasing AD and hence leading to real growth. Time lags: education requires a very long gestation period and it takes many years for any education policy to take effect. -positive impact of education on boosting the PC of the economy may be experienced only years after the policy is implemented -theres no guarantee that skills taught now will still be relevant in future. -forward planning for education and a sustained emphasis on it is crucial
Inflation
a situation where there is a sustained increase in the general price level of an economy
rise in AS illustrated by downward shift of horizontal portion of AS downwards,
could be due to 1) fall in price of FOPs 2) improvement in productivity of FOPs will lead to a fall in GPL within an economy. thru the wealth effect, into substitution effect and interest rate effect, consumption, investment and export exp will rise (represented as movement along AD curve from y1 to y2 until equilibrium is restored at a higher eqm national output.
sustained EG
economy real national output increases over an extended period without accelerating inflation rates. If EG is driven by rise in AD, there will be a rise in real output assuming the economy is operating below full employment level. when output increases, demand deficient unemployment will fall as firms hire more workers to produce the increase in output. as AD continues to rise, the economy will eventually reach full employment output. without a growth in productive capacity, further rise in AD will only cause demand-pull inflation or accelerating inflation without a corresponding increase in real output, reducing purchasing power of citizens.
external value of money
foreign exchange rate
Potential Growth
increase in capacity (potential) of economy to produce.
3 main reasons of structural unemployment
1) a change in method of production (resulting in technological unemployment) -> unemployed are unable to fill these new posts as their old skills may no longer be applicable 2)globalisation 3) a change in pattern of demand 4)others regional unemployment -> cos of concentration of particular industries in particular areas
GPL
average price of all goods and services in the economy during a period of time
unemployment
the condition of the economy in which some FOPs are not being used in the production of gds and services. unemployment rate = no.of unemployed/labour force x 100%
why are wages sticky downwards
wage contracts-> employees have wages specified in medium term employment contracts that cant be renegotiated immediately, partly bcos some workers are protected by trade unions. since wages cant fall, firms may choose to lay off workers instead, causing unemployment to rise. employees morale -> firing only affects the minority pay cuts may affect everyones morale. by not cutting wages of those who are not laid off, they are likely to become much more productive than before -fear of best ppl leaving ->if any employer cuts salaries across the board, its quite likely that better workers will find work elsewhere.
crowding out effect
when the govt has to borrow in order to finance the govt exp. when govt becomes debt-ridden from years of fiscal budget deficits and don't have sufficient fiscal reserves to fund its fiscal plans. borrowing by govt -> increase in dd for loanable funds -> increase in interest rates higher interest rates -> higher cost of borrowing HHS will have incentive to save and borrowers will borrow less to spend on G&S -> lower C and interest rate earnings they get from banks are higher -firms will cut bank on I as the rate of return on investment for some projects is now lower than the interest costs -therefore govt spending will be offset by lower C and I. govt spending thru borrowing money drives up interest rates which leads to fall of private hh consumption and investment exp as opportunity cost of borrowing has increased. Expansionary FP less effective for govts that have to finance to increase govt exp. thru borrowing due to unintended consequences of govt spending crowding out private consumption and investment. crowding out effect doesn't apply to SG -> accumulating reserves thru persistent budget surpluses
frictional unemployment
when workers leave their jobs and are unemployed for a period of time while searching for a job the better the economy is doing, the lower this type of unemployment as ppl will usually be able to find jobs that suit them more quickly when the economy is doing well. causes a) imperfect info b)incentives problem
cost push inflation
where prices are pushed upwards by continual increases in UCOP, which are NOT caused by increases in AD. when UCOP rises, AS falls, with only the horizontal section of AS shifting upwards. persistent rise in UCOP will generate a sustained rise in GPL and a fall in real national income. when there's a rise in UCOP, profit motivated firms will be willing to continue producing the same output level only if they receive higher prices. AS falls rep by horizontal segment of AS curve shifting upwards to AS2. equilibrium GPL rises to P2 as firms pass on higher unit costs onto consumers as higher prices, while equilibrium national output drops to Y2. if cost push pressure continues, AS continues to fall while horizontal section of AS curve continues to shift up and GPL continues to rise.
Floating (flexible) exchange rate system
(exchange rate allowed to float or adjust freely. Exchange rate is volatile and will fluctuate daily as market conditions change.) The exchange rate is determined by market forces eg interaction of demand and supply of a currency in the forex market. There is no govt intervention in the forex. Market Any changes in dd for and ss of the currency will cause the exchange rate to change. Any increase in demand for S$, ceteris paribus, will lead to an appreciation (price of SGD rises in terms of japanese yen). A rise in ss of SGD in foreign ex market will lead to depreciation of SGD.
Policies which increase QUANTITY of FOPs (LABOUR)
-raising retirement age or re employment age -> qty of labour rises-> PC rises -removing barriers to labour flows -> loosening its immigration policy UC: immigration policy -> overcrowding on public transport & housing shortages if public and social infrastructure is not ready to accommodate an influx of foreigners into the country -slow down restructuring of the economy as firms are less likely to adopt more efficient capital-intensive methods of production when low cost foreign labour is readily available -ironically slows down PG due to weak productivity growth Reducing income tax -increases disposable income -> incentive for ppl to work longer hours and wld attract foreigners to join labour force -> increases qty of labour and PC rises -highly skilled foreign labour attracted by lower income tax rates -> quality of labour will improve as well. -assuming wages remain constant, this results in fall in UCOP
Policies which increase QUANTITY of FOPs (capital)
-reducing corporate tax rate -> increase in capital stock -> encourages both domestic and FDI -> higher exROR on investments Increase qty of capital and PC rises UC: I is component of AD-> and increase in domestic I and FDI will result in rise in AD -with both AD and AS rising, sustained EG is achieved, esp important to economies which were initially operating near or at full employment level. -Removing/reducing restrictions to capital flows ->removing or reducing current restrictions imposed on FDIs Increase qty of capital and PC rises UC: I is component of AD-> increase in FDI will result in rise in AD with both AD and AS rising, sustained EG is achieved, esp important to economies which were initially operating near or at full employment level. W the tech/newer skills that come w FDI, quality of capital will also improve. This is one other reason for the increase in PC and AS when restrictions to capital flows are reduced or removed. UC: susceptibility to external shocks -heavy reliance on FDIs and hence large multinational corporations may result in the economy being vulnerable to external shocks. Eg if these FDIs sudd pull out due to eg trade conflicts Govt spending on infrastructure Increase qty of capital and PC rises UC:govt spending on domestically produced gds n services is a component of AD -> AD also rises when govt spends on infrastructure With both AD and AS rising, national income increases substantially, allowing economy to achieve sustained growth. Increased spending on transport and communication networks -> help business reduce costs and improve efficiency. This will result in a lower UCOP of production for whole economy and increase in AS (horizontal portion of As curve shifts downwards), which will further boost AG.
evaluation of MP 3) size of domestic sector
3) Size of domestic sector The size of the domestic market (domestic C + I) out of GDP affects the extent of impact of interest rate policy. If consumption and domestic investments are small relative to the export sector, interest rate policy aimed at increasing these components might not have much impact on the country. Eg SG small domestic C and I as proportion of GDP -> small population size and very open economy. SG use E I/R centred MP to boost AD to increase national Y -> extent of rise in AD may not be significant. This limits effectiveness of interest rate policy to affect AD and hence the goals of full employment or GPL stability.
quantitative easing
>when C MP of low i/r is ineffective in stimulating growth -> Central banks use QE to spur increases in AD and provide further stimulus. Central Bank's policy of directly increasing the money supply by buying government and corporate bonds from the public. When i/r is very low (liquidity trap) and Central Banks are not prepared to cut interest rate until it reaches zero or become negative, they cld resort to increasing the money supply (evn tho interest rate will not fall since economy is in a liquidity trap.) In QE, the central bank buys financial assets such as government bonds and equities at a very large scale from commercial banks, private firms and individuals to inject a large amount of cash into the economy. The money is created electronically and credited in the reserves accounts of these institutions/individuals. When central banks buys bonds from the commercial banks, it increases their reserves and this will encourage commercial banks to lend more money to consumers and businesses.
deflation caused by rising AS
Assume factor changed to cause UCOP to fall so that AS rises. firms respond by increasing QS at each price level. with excess AS, firms will have to cut prices to stimulate spending and so reduce excess supply. GPL falls to p2 whilst national output rises to y2. if unit cost falls persistently, then GPL will be falling persistently.
evaluation. of MP 5) unintended consequences
Cuts in interest rate to boost economic growth could lead to policy conflicts by creating/increasing inflation. While the trade-off with inflation is to be expected given that when AD rises over the upward sloping segment of the AS curve, cuts in interest rate by the Central Bank tends to influence workers'expectations of inflation. It could be perceived as a signal that general price levels are expected to rise and this feeds into worker's demand for higher wages, leading to cost-push inflationary pressure as well. Cuts in interest rate and quantitative easing to boost EG also affect asset prices, eg property prices. While the resultant rise in property prices creates a wealth effect that further boosts C and AD, the rise in property prices makes home ownership less affordable to the poor, giving rise to greater inequity in distribution of housing. This may lead to asset (property and shares) bubbles, which may be destabilising should such bubbles burst. A cut in interest rate also tends to be nefit firms since they incur less cost in investment while savers receive lower returns. There is thus a redistribution of income that causes a greater inequality in income distribution. Such consequences can lead to a lack of political acceptability of the policy.
Evaluation of exchange rate policy Nature of the economy
For a very small and open economy like SG, exchange rate depreciation will not be effective in improving a trade deficit.This is due to cost-push inflation that results from the exchange rate depreciation. When sg exchange rate depreciates, our exports become cheaper in terms of foreign currencies, but the costs of imported inputs increases. This may result in an increase in domestic cost of production, which will partially erode the improved price competitiveness of the exports. Exchange rate depreciation will also increase the price of imported gds and services in domestic currency, adding to inflationary pressures in the economy. If workers and trade unions press for higher wages in view of higher cost of living (due to more expensive imports arising from depreciation), it may even generate a wage-price spiral.such cost-push inflation reduces the improved competitiveness of exports and import substitution effect that was intended by the depreciation.
Monetary policy centred on foreign exchange rate (exchange rate policy)
Foreign exchange rate = rate at which one currency can be exchanged (or traded) for another in the foreign exchange (forex) market.
budget deficit
G > T use past accumulated fiscal reserves/borrowing -> less resources avail in future for govt to spend on social and developmental needs -> intergenerational transfer of welfare from future generations to current ones (main consequence)
evaluation of MP 4) liquidity trap
Occurs when the market interest rate in the country has already reached its lowest possible level and cannot fall any further. As the market interest rate will not fall any lower, C and I will not increase. In recent times, central banks have explored the possibility of negative interest rates to increase borrowing in times of economic recession. Central Banks lowers the overnight rate (rate in which Central Bank lends money to commercial banks, who then lends to consumers and firms), making it negative. Theoretically, this spurs higher borrowing and hence economic activities. However, the effectiveness of such policies has been inconclusive.
Evaluation of exchange rate policy Presence of spare capacity in the economy
Presence of spare capacity in the economy Depreciation of exchange rate results in actual growth and rise in employment only if there is spare capacity. If theres a lack of spare capacity, dd-pull inflation will result, and the advantage on price created by the exchange rate depreciation will be eroded away by inflation.
Evaluation of exchange rate policy Price elasticity of demand for imports and exports
Price elasticity of demand for imports and exports Exchange rate depreciates -> import exp fall and export revenue increase -> net exports increase and AD rises Exchange rate depreciation causes export prices to fall in terms of foreign currency. As long as QD for exports by foreigners is inversely related to their prices, export earnings will still rise (even if its rather price inelastic). The greater the demand elasticity, the greater this rise in export earnings will be. Depreciation causes import prices to rise in terms of local currency. If demand for imports is price elastic, the total exp on imports in local currency falls and reinforces the improvement to net exports.
Evaluation of exchange rate policy Retaliation by other countries
Retaliation by other countries If a major exporting country depreciates its currency (now cheaper), its trading partners may suffer a fall in their export revenue, as other countries choose to buy exports from this major exporting country instead of its trading partners. At the same time, the trading partners'home industries may also face stiff competition from cheaper imports. The trading partners of this major exporting country may then retaliate by depreciating their currencies. (the Great Recession after the 2008 global financial crisis) Such competitive depreciation would offset the intended improvement in export competitiveness for the country that first initiated the depreciation. Demand for its exports may not increase by much due to competition from the cheaper alternatives when its trading partners also depreciate their exchange rate.this may result in a 'currency war' where currencies are depreciated against each other to protect the countries' domestic industries. This will destabilise free trade and global economic growth.
Managed Float Exchange Rate System
Some countries prefer to manage its exchange rate so as to eliminate significant fluctuations in order to facilitate decision-making in international trade and investments. Managed float system -> they can enjoy some flexibility in managing their exchange rates while at the same time not allow for sudden massive fluctuations which can have detrimental effects on their economies. Managed float exchange rate system = the exchange rate is allowed to fluctuate according to market forces within an undisclosed band. (see wks for diagram) As long as value of the currency is within that band, the central bank will not intervene in the forex market. When dd and ss conditions change such that the value of the currency exceeds the upper limit L1 or falls below the lower limit L2, active central bank intervention is then necessary. *The central bank will intervene to sell off (increasing SS of S$) or to buy back (increasing DD for S$) the currency in the forex market to keep the exchange rate within the band.
policies improving quality of FOPs
Subsidising or direct provision of education ->education improves quality of human capital -> increases productivity of labour within the country -> results in increase in country's PC -assuming wages remain constant, an increase in labour productivity will also decrease UCOP within the country. UC: a better educated workforce is more productive, flexible and occupationally mobile -> attracts more FDI. I which is a component of AD rises -> AD rises With both AD and AS rising, national income increases substantially, allowing economy to achieve sustained growth. Subsidising training and upgrading of skills -provide training facilities or subsidies to encourage workers to go for further training and upgrade themselves -> raise the quality of workers as workers wld be able to generate more output per man hour which increases the country's productive capacity and causes AS to increase, illustrated by rightward shift in vertical portion of AS curve. -assuming wages remain constant, increase in labour productivity will decrease UCOP within country. -left to free market, private firms may not provide sufficient vocational training bcos of the possibility that workers may leave them and join competitors after they have been trained. 2015 singapore govt launched SkillsFuture Credit scheme acts like a voucher and aims to encourage individual ownership of skills development and lifelong learning.aims to continually improve labour productivity which will boost quality of labour Eval Costs incurred : imposes a burden on govt budget Possibility that newly acquired skills are not what is required by markets. Theres usually great resistance in acquiring new skills, esp among relatively older workers who might either be reluctant to train or are unable to b trained (attitude n ability problem). Impact of training on productivity of workers and output performance of industries will also not happen immediately.
evaluation of MP 2)size of multiplier
The size of multiplier is determined by the marginal propensity to save (MPS), marginal propensity to tax (MPT) and marginal propensity to import (MPM). A country with a low MPS, MPT and MPM will have a relatively large multiplier. In these cases, monetary policy will be effective in raising output and employment to the desired level. Sg small multiplier -> high MPM due to lack of natural resources -> high MPS due to compulsory savings eg CPF or Asian thrift nature → high MPT -> difficult for MP to raise output and employment to desired level.
occupational immobility
a particular problem w structural unemployment where existing skills are no longer required and those retrenched don't possess the skills that r in demand to take up jobs in other sectors of the economy
disinflation
a period where the inflation rate is still positive but declining over time
sustainable growth
a rate of growth that is sustained without creating other significant socio-economic issues eg depleted resources, esp for future generations.
demand pull inflation
a result of continuing increases in AD when the economy is near or at full employment. when economy is near or at full employment, continual increases in AD will cause AD to persistently exceed AS, causing prices to be pulled up.
stagflation
a situation of high unemployment and rapid inflation with negligible growth in national output or even contraction of national output
factors affecting AG
a) increase in AD -> if AD increases due to an increase in any of its components, eqm real national output will increase resulting in AG, assuming there is spare capacity in economy. the rise in AD will cause shortages and cause an unplanned fall in inventories of stored unsold gds. firms would respond by increasing production and raising employment of FOPs. thru the multiplier process, there will be a multiplied increase in RGDP within economy from y1 to y2. b) decrease in UCOP AS rises -> horizontal portion of AS curve shifts down. assuming AD remain constant, rise in AS results in an increase in eqm rGDP from y1 to y2. this increase in eqm rgdp is actual growth.
causes of cost push inflation
a) wage push b)increase in price of imported inputs -> imported inflation -> depreciation of foreign exchange rate c) tax push inflation -> raise indirect taxes like GST -> rise in GPL -> due to increases in UCOP -pass on these taxes to consumers by raising prices -> GPL rises -cost of living of HHS rise -> workers ask for higher wages to maintain their purchasing power -> UCOP rises -> more than 1 round of increase in GPL
fiscal sustainability
ability of government to maintain public finances at a credible and serviceable position over the long term
labour force
all those aged 15 and above who are willing and able to work and are either employed or actively seeking employment. also known as the economically active group. labour force participation rate = labour force/working age population x 100%
bracket creep
assuming a progressive tax structure, the rising wages of taxpayers pushes them into higher marginal tax brackets (have to pay a larger fraction of their nominal income in taxes)
Demand Deficit/ Cyclical Unemployment
caused by a fall in AD when theres recession, CU is high as demand for labour falls due to weaker or lower AD .in times of economic boom, CU will be low, as dd for labour rises in economy w stronger or higher AD. assume economy initially producing at yf -fall in AD-> firms unable to sell their current level of output. -may be prepared to build up stocks of unsold gds, but sooner or later, they will start to cut back on production n will reduce their demand for labour. (since labour is derived dd) -fall in national income will trigger cuts in consumer spending due to multiplier effect. -assuming economy initially operating at full employment, fall from ad0 to ad1 will result in equilibrium level of output falling to y1. -since full employment level of output is at yf, gap yf-y1 reflects difference between actual output of economy and its potential national output. -> this gap also indicates presence of demand deficient unemployment (firms will cut back on labour employed in terms of recession, shifting dd from DL1 to DL2. but even tho there was a fall in dd for labour, the wages didnt fall to w2 as wages are "sticky" downward inflexible.
structural unemployment
caused by structural changes in economy and occupational immobility that result in some workers becoming unemployed for very long periods of time bcos they cant find jobs that require their particular skills -> mismatch of skills between unemployed and required by producers
monetary policy
central bank of a country uses interest rates or exchange rates as alternative instruments to achieve macro goals of the country -> an AD management tool whereby Central Bank uses money supply or interest rate to influence AD to achieve countries macro aims SG has adopted use of exchange rate instead of interest rate as the instrument of monetary policy
monetary policy strengths vs fiscal policy
central banks are often independent of the govt hence there is less political constraints and MP does not involve govt spending and tax revenue. I/r can be adjusted incrementally, making it more flexible and suitable for small or frequent changes. its quicker to implement compared to fiscal policy. there's no crowding out effect compared to fiscal policy.
tax revenues
comes from direct and indirect taxes direct = taxes imposed on all forms of Y and is paid directly to govt, eg personal Y tax and corporate tax indirect taxes = compulsory levy imposed on the sale of gds n services eg gds and services tax (GST)
Contractionary FP explaination
decrease AD and lead to a leftward shift of AD as G,C and I fall. with AD<AS at the current GPL, there will be an unplanned rise in inventories. this will lead to firms reducing production and hiring less FOPs, such as labour. when output is reduced, the resulting rise in u/e means that firms are better able to get the resources that they need, resulting in more efficient factor combinations and falling UCOP. therefore, there will be less inflationary pressure in the economy and the GPL decreases if economy was operating near or at Yf previously.
discretionary fiscal policy
deliberate manipulation of taxes and govt spending to achieve macroeconomic objectives
seasonal unemployment
demand for certain types of labour fluctuates with the seasons of the year.
impact of inflation on households MSOL
depends on inflation rate relative to rise of households nominal income. rate of change in real income = rate of change of nominal income-inflation rate
geographical immobility
difficult for FOPs eg labour to move from different regions of the country workers unwilling to move to other regions w job opportunities for them structural unemployment may be caused by persistent cyclical ue if economy suffers from long lasting low AD over time, skills of the unemployed workers could become rusty and obsolete.
internal value of money
domestic purchasing power
eval of monetary policy 1) interest rate sensitivity of consumption and investment exp. (IMPORTANT)
during recession, investment dd may not be sensitive to a fall in I/r. firms are unlikely to borrow to invest if they are already facing excess capacity and when the exROR on investment is low due to poor business outlook. hence, if demand for investment is interest rate inelastic, a fall in interest rate will be met with a less than prop rise in investments. thus, a decrease in I/r would not be as effective in stimulating I and hence AD. consumption is also likely to be interest insensitive in times of recession. HHs facing the prospect of retrenchments and falling incomes are unlikely to be enticed by lower I/r to borrow for consumption. thus, during recession, C and I would be unresponsive to interest rate cuts due to poor consumers and investors sentiments, and hence expansionary MP may be ineffective to stimulate the economy. BUT during demand pull inflation , a contractionary MP is meant to reign in AD and prices. however the rise in I/r may not be very successful in discouraging consumption spending or investment spending if hhs and firms have a very positive outlook of the economy. if business and consumers confidence are high, firms will invest even if I/r increases and borrowing is more expensive. thus, lowering I/r may not have a significant impact on investment if dd for investment is interest rate inelastic. thus, rise in AD may not be curtailed and there may be limited impact in reducing dd pull inflation.
frictional u/e
economy suffers from productive inefficiency -> wasted unused labour resources ->existence of idle resources means that the economy will be at a point within its production possibility curve PPC -rise in u/e rate, bleak business prospects -> fall in investment by firms since investment is component of AD -> AD will fall creating downward multiplier effect on countries GDP -falls in I will also slow down PG since fall in I will cause countries capital stock to expand more slowly.
size of multiplier
effectiveness of fiscal policy is limited if countries have a small multiplier size of multiplier is determined by marginal propensity to withdraw (MPW = MPS + MPT + MPM) a country with high savings rate (MPS) high income tax rate (MPT) or heavy import dependence (MPM) will have a small multiplier size. It will be difficult for fiscal policy to raise output and employment levels for countries with a small multiplier due to higher propensity to withdraw (more leakages) therefore the multiplied increase in RGDP is limited.
size of domestic sector n govt sector
expansionary FP aimed at increasing C and I thru lower direct taxes might not have much impact for a country w a small domestic sector eg SG where domestic consumption exp accounts for only 37% of GDP. SG export revenue is abt 176% of GDP. impact of FP limited if govt sector is small relative to export sector n domestic private sector
deflation caused by falling AD
firms respond to fall in AD by lowering output. when output is reduced, the resulting rise in unemployment = firms are better able to get the resources that they need resulting in more efficient factor combinations and falling UCOP. firms willing to sell lower output at lower prices. fall in GPL -> further decreases in AD and hence persistent falls in GPL. once there's a fall in GPL, consumers tend to expect prices to drop further and will postpone their current spending. AD falls again and subsequent decreases in GPL and national output. recession worsens.
promotion of social equity
fiscal policy used as a tool for income redistribution -> progressive direct taxation, transfer payments (Edusave top ups, workfare income supplement) to boost purchasing power of lower income households.
transfer payments
funds paid to individuals by the govt for which it receives no goods and services in return. will not directly increase AD as they don't contribute towards demand for final gds and services. AD increases indirectly only when household recipients of these payments spend the transfer payments received on final goods and services. this will then cause C component in AD to rise.
fiscal policy
government changing the level of taxation and government spending in order to influence the AD and the level of economic activity. government budget =. tax revenues- govt spending govt spending -> govt exp and transfer payments
expansionary fiscal policy explanation
if govt aims to encourage EG and improve demand deficient unemployment an expansionary fiscal policy would increase AD -> rightward shift of AD from AD1 to AD2 as G, C and I increase. with AD exceeding AS at current GPL, there will be an unplanned fall in inventories (shortage of gds and services). this will lead to firms increasing production and hiring more FOPs such as labour to replenish inventories. as a result, households income will increase and this increase in purchasing power will induce higher consumption of other domestic gds and services. this leads to further increases in production and more FOPs hired resulting in another cycle of spending.the national income will be higher as output increases further. the multiplier process will lead to an increase in rGDP to y2 that is a multiple of the initial injection. as a result, there will be actual growth from Y1 to Y2 and a fall in demand deficient unemployment.
actual EG
increase in actual national output. (when country moves from a point inside Ppc to a point on PPC, its producing more of both goods.)
outward shift of PPC
increase in productive capacity (max possible output that can be produced by economy) there has been potential EG.
wage price spiral
inflation occurs due to interlocking process of cost increases and demand increases
contractionary fiscal policy
involves raising direct taxes and or decreasing government spending, usually used to tackle demand-pull inflation. when economy is booming and approaching full employment, dd pull inflation will rise
real value of money
its purchasing power of the quantity of goods and services that it can buy. GPL and real value of money are inversely related, inflation leads to a decrease in the real value of money bcos when prices of gds n services rise in general, the same amount of money can now buy fewer units of goods and services.
consumer price index
measures changes in price of a fixed basket of goods and services commonly purchased by an average household over time, w respect to a selected base year.
unemployed
people of working age who are without work, but are willing and able to work -they are actively seeking employment or waiting to take up an appointment
economically inactive
people without a job bcos they have not actively sought work in the last two weeks or are not available to start work in the next 2 weeks.
inflation rate
rate of change of the GPL
inclusive growth
rate of growth that is sustained over a period, is broad-based across economic sectors and creates productive employment opportunities for the majority of the country's population.
expansionary fiscal policy
reducing direct taxes and or increasing government spending to address the problems of negative real/actual growth (recession) and demand deficient unemployment bcos of a fall in private dd of domestic gds and services. govts can also adopt expansionary fiscal policy to combat demand side deflation
expansionary monetary policy
refers to the deliberate lowering of interest rates or increasing of money supply (quantitative easing ) to boost AD interest rate centred monetary policy can influence consumption expenditure (C) and investment spending (I). the cheaper access to credit will encourage consumers to spend and firms to invest, to stimulate the economy and lower dd deficient u/e during a recession. with lower interest rates, the cost of borrowing falls and households are incentivised to purchase consumer durables such as cars and properties thru loans. also, consumers will receive lower returns on their savings from banks thus lowering the opp cost of consumption. hence, planned consumption exp will be encouraged. w a fall in cost of borrowing, firms will undertake new investments. profit-maximising firms will invest to the point where exROR from one unit of investment (MB from I) equals to the interest rate (MC of I). assuming ExROR remains constant, w a lower interest rate, some investment projects that were previously not profitable might now become profitable. these investments will now be undertaken and I will increase. assuming economy is operating below full employment, the rise in C and I will cause AD to increase (from AD1 to AD2). with AD exceeding AS at the current GPL, there will be an unplanned fall in inventories. this will lead to firms increasing production and hiring more FOPs such as labour. HHS income will increase and this increase in purchasing power will induce higher consumption of other domestic gds and services. AD will increase further. this leads to further increases in production and more FOPs hired resulting in another cycle of spending. the national income will be higher as output increases further. this multiplier process would lead to an increase in rGDP to y3 that is a multiple of the initial injection. as a result, there will be AG and a fall in dd deficient u/e.
.supply side policies to improve the quantity and quality of FOPs
seeks to increase AS by raising potential output Yf thru increasing the quantity and or quality of FOPs, and thus shifting the vertical portion of the AS curve rightwards and lowering the unit cost of production and thus shifting horizontal portion of AS curve downwards
promotion of long term EG thru supply side effects
subsidies apply for worker retraining and skills upgrading -> increase PG and PC of sg economy sg low income tax rates which attract more foreign talents to supplement our small local talent pool. corporate tax has also been kept at a competitive level (17%) to promote entrepreneurship and attract FDI -> boost AD and AS and EG and employment
deflation
sustained decrease in the GPL of an economy
fiscal policies to achieve inclusive or sustainable EG
targeted transfer payments for the lower income/skilled and or income tax cuts for lower income groups. -> increases C and AD and ensures their welfare increases -> increase taxes on rich and provide greater transfer payments to poor. increase in real output bcos the poor typically spend a larger proportion of any additional income on consumption (marginal propensity to consume, MPC is higher for the poor) such that the rise in consumption by poor will exceed fall in consumption by rich due to higher taxes, overall C and thus AD will increase. sustainable EG -> increased govt spending on green energy eg build solar powered energy facilities -> increase AD and AS and emit less pollution so cleaner environment and mire sustainable future.
consumer n investor confidence
tax cuts may not stimulate consumption esp during a recession if consumers and investors feel pessimistic abt future. poor consumer sentiments and uncertainty in economic outlook -> consumers worried abt job security and expect falls in future income. -> withhold consumption and increase precautionary savings consumers may also believe that any tax cuts now would worsen the budget position and only bring abt tax increases in future (as govt seeks to repay its debt if govt finances any deficit w borrowing and may thus not spend the increase in disposable income arising from tax cut.) tax cuts may not bring abt significant increase in private investment if firms are not optimistic abt future prospects -> firms pessimistic abt their exROR on investments. with poor consumer sentiments and expected fall in sales, firms may see little incentive in expanding their capacity to produce. low confidence in the economy during a recession wld often make consumption and investment unresponsive to tax cuts, limiting a govts ability to stimulate AD.
money supply
the total money stock avail in an economy at a point in time. cash, deposits in current and saving accounts of banks.
effectiveness of policies
to what extent are the intended consequences achieved -> consider the factors and or constraints that may affect the policy outcomes
appropriateness
to what extent are the intended consequences achieved? what are the unintended consequences of the policy?
technical recession
two consecutive quarters of negative AG
contractionary monetary policy (tightening or credit squeeze)
where interest rates are raised or money supply is reduced so as to reduce AD. central banks typically seek to reduce AD with the aim of reducing inflationary pressures. contractionary monetary policy is used if forecasted inflation is higher than the target. w a higher interest rate, cost of borrowing rises. for firms some investment opportunities that were profitable perviously now become unprofitable ie interest rate is now higher than the exROR. -> I will decrease. HHS seeing that the cost of loans is higher may decrease planned consumption spending (C). consumers will receive higher returns to their savings from banks which increases the opportunity cost of consumption -> C will be discouraged. the fall in C and I will cause the AD curve to fall from AD0 to AD1, lowering the GPL from P0 to P1. assuming that the economy was initially in equilibrium at full-employment level of output, YF and GPL is at P0. The fall in AD leads to AD < AS and hence there will be an unplanned rise in inventories. Firms will reduce production and hire less FOPs such as labour. when output is reduced, the resulting rise in u/e means that firms are better able to get th resources that they need, resulting in more efficient factor combinations and falling UCOP.therefore there will be less inflationary pressure in the economy and GP decreases to P1.
