Economics prep

Aggregate Demand

The level of expenditure on total production or output that is planned at various price levels.

Aggregate Demand Explanation

The government acts as a stabilizer for Aggregate Demand. It can influence individual components through fiscal and monetary policy and influence GPL through fiscal measures that impact aggregate supply.

Aggregate Supply

The level of total production or output that producers plan to supply at various price levels

Short Run Aggregate Supply

Short Run AS: how Aggregate Supply levels may vary due to willingness of suppliers to produce

Long Run Aggregate Supply

Long Run AS: representation of the maximum combination of resources being fully utilized. Also influenced through fiscal and monetary policy

General Price Level

The measure of the average price of all goods and services in an economy over a certain period

Real GDP

Value of final output of an economy’s goods and services adjusted for the effects of inflation

Productivity

Producing the most units possible with the least amount of resources to best satisfy societies unlimited wants and needs.

Labor Productivity

A focus on the relationship between the labor resources used in a production process and the output achieved with the goal of seeking to maximize output per hour of work

Labor Productivity Calculation

Calculating output per worker per hour

Labor Productivity Involves

Involves employment

Capital Productivity

A focus on the relationship between the capital resources used in a production process and the output achieved with the goal of seeking to maximize output per capital goods per hour

Boom

A period of rapid economic expansion. Leads to inflation, overconsumption, and resource use.

Boom Fiscal Measure

Fiscal Measure: cut government spending, raise taxes

Downturn

Period of general decline in the economy

Downturn Fiscal Measure

Fiscal measure: raise government spending, cut taxes

Allocative Efficiency

Occurs where a growing country is producing in a way that generates the maximum benefit for consumers and the country.

Allocative Efficiency Focus

Focuses on the long-term net benefit for the economy and those impacted by it

Productive Efficiency

When the economy is producing the maximum quantity of output with its productive resources.

Productive Efficiency Neglects

Neglects important factors in production, such as quality of product and labor. (Doesn’t coincide with environmental support)

Fiscal Policy

Measures undertaken by the government in relation to raising revenue.

Discretionary Fiscal Policy

The deliberate manipulation of government expenditure and revenue to achieve economic objectives.

Deficit Budget

Government response during a downswing as it increases aggregate demand and economic activity.

Surplus Budget

Reduces the size of aggregate demand and reduces pressure on inflation

Fiscal Policy Examples

Spending on infrastructure, tax cuts, stimulus packages, handouts

Monetary Policy

Policy measures enacted by the RBA to bring about changes to Aggregate demand by influencing money supply and cash rate.

Monetary Policy Cash Rate

Increase in cash rate leads to increase in interest rates and vice versa.

RBA Actions

When the economy is slowing, the RBA will lower the cash rate to stimulate the economy. When it is overheated the RBA will raise the cash rate to slow the economy.

Monetary Offset

Occurs when a central bank responds to expansionary fiscal policy with contractionary monetary policy and offsets fiscal policy.

Monetary Offset Counteracts

Counteracts fiscal, causing further structural problems in an economy

Structural Economic Problems

Persistent, long-term issues that affect the fundamental health and functioning of an economy.

Inflation

A general increase in the prices of goods and services in an economy over a period of time

Insolvencies

A state where a person or company is unable to pay their debts as they become due.

Cost-Push Inflation

Inflation that results from rising production costs

Demand-Pull Inflation

Inflation that results from excessive demand

Stagflation

A situation in which inflation exists simultaneously with low levels