Definitions of Economics
- Economics is the study of how people, firms and societies choose to allocate their scare resources to satisfy some of their unlimited wants.
Definitions of Unemployment
- Unemployment in a country is measured by the unemployment rate. It rises during a period of recession and falls during a period of expansion.
Definition of inflation
- Inflation is defined as the persistent and sustained increase in the price level of goods and services in the economy
Definition of Gross Domestic Product (GDP)
- GDP considers only the value of final output. Avoid the problem of double counting. To avoid double counting, we sum up only the ...view middle of the document...
An expansionary fiscal policy can be in the form of higher government spending.
2) Contractionary fiscal policy to close n inflationary gap: When an inflationary gap exist, the government can use a contractionary fiscal policy to close the gap and solve the inflation problem. A contractionary fiscal policy can be in the form of lower government spending
The business cycle
Definition of Potential GDP
- Potential GDP is the value of final goods and services produced within a country when all resources are fully employed. It is a measure of the productive capacity of an economy, in the long run, as the amount of resources in a country increases, potential GDP will also increase. Real GDP fluctuates over time. The periodic but irregular fluctuations of real GDP around potential GDP is reflected in the business cycle.
- Expansion: A period where real GDP is increasing
- Peak: A period where real GDP is at a maximum
- Recession: A period where real GDP is decreasing
- Trough: A period where GDP bottoms out
Inflation formula: CPI this year – CPI last year/CPI last year x 100% (Calculate 2005 inflation rate if the price level in 2004 is 115 and the price level increases to 120 in 2005
Inflation rate: 120-115/115*100%=4.3%. CPI (Consumer price index – deflation)
Causes of inflation:
Inflation is either caused by an increase in AD or a decrease in SRAS/ Demand pull inflation: Effect of an increase in AD. Demand pull inflation is an increase in the general price level resulting from an initial increase in AD. It may caused by increase in money supply. It is an excessive spending that pulls the price level upwards. Demand pull inflation usually occurs during economic upturn. Cost push inflation is an increase in price level resulting from an initial increase in cost of production. Cost push inflation is cause by increased in wages and the price of raw materials (Cost of production increase and price level gets pushed upwards)
Types of unemployment
- Frictional unemployment: Transitional unemployment due to people moving between jobs.
- Structural unemployment: arises when changes in technology or...