Macroeconomics

contractionary fiscal policy

govt. cuts spending or increases taxes to cool down overheating economy/ decrease inflation

expansionary fiscal policy

govt. increases spending or cuts taxes to stimulate an economy in a downturn

contractionary monetary policy

reserve bank raises interest rates to decrease money supply and cool down economy/ decrease inflation

expansionary monetary policy

reserve bank decreases interest rates to increase money supply and stimulate economic activity during a downturn

fiscal drag

purchasing power may not increase, but higher wages pushes people into higher tax brackets, making them pay more

MPC

the proportion of a dollar from income that people spend

MPS

the proportion of a dollar that people save

multiplier effect

initial change in spending causes a larger overall change in real GDP because the extra income is repeatedly spent

what components of AD change when OCR decreases

net exports, investment, consumption

what should you refer to on a graph shifting both curves

which shift is bigger

target for inflation

1-3%

increase in trade weighted index

export prices increasing faster relative to import prices

multiplier formula (MPC)

1 / 1- MPC

multiplier formula (MPS)

1 / MPS

derived demand

demand for a good, service, or factor of production that occurs because of the demand for a different, related final product

if given MPC how should calculate

1-MPC= MPS

1 / MPS = y

y x spending

what happens on the foreign exchange model when OCR increases

DNZ$ increases, SNZ$ decreases

what happens to exports/ export receipts when the OCR increases

exports decrease (relatively more expensive), export receipts decrease (lower conversion receipts)

what happens on the ad/as graph when OCR increases

decrease in AD, increase in AS

what components of AD are affected when OCR increases?

decrease in C, I (X-M)

consumption when OCR increases

more saving, less discretionary spending, cost of borrowing increases

investment when OCR increases

higher cost of borrowing, making investment more expensive, reducing potential profits from investments

net exports when OCR increases

export receipts decrease, import receipts increase

why does AS increase when the OCR increases?

the cost of imported raw materials decreases from appreciation

negative wealth effect

decline in the value of household assets makes consumers feel less wealthy and financially insecure, meaning they cut back on discretionary spending

characteristics of a recession

negative GDP growth, rising unemployment, falling consumer confidence/ spending, lowered inflation

recession

significant, prolonged downturn in economic activity

characteristics of a peak

max output and capacity, low unemployment, rising inflation/ overheating, high real GDP

characteristics of a trough

bottoming economic activity, high unemployment, low inflation, cautious consumer spending

characteristics of an expansion

rising real GDP, falling unemployment, increased consumer confidence and spending, emerging inflationary pressures