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11A-34 Station - Unit 4, 24.1, CONSEQUENCES, ADVANTAGES, *DISADVANTAGES,…

- - - - GOVERNMENT BUDGET
- - - - 24.3
        
        Main Purpose
        
        Used to change Total Demand (how much people are buying).
        
        Two Types of Policy
        
        1. Expansionary Monetary Policy
        
        When to use: To grow the economy and create jobs (reduce unemployment).
        
        What the Central Bank does:
        
        Lowers interest rates.
        
        Increases money supply.
        
        Result: People borrow/spend more →→ Total Demand goes UP.
        
        *2. Contractionary Monetary Policy
        
        When to use: To control fast-rising prices (inflation).
        
        What the Central Bank does:
        
        Raises interest rates.
        
        Reduces money supply (or slows its growth).
        
        Result: People borrow/spend less
        → Total Demand goes DOWN
        → Price pressure goes down.
        
        Simple Summary to remember:
        
        Expansionary \= Economy is slow →→ Make money easier to get →→ Boost Demand.
        
        Contractionary \= Prices are rising too fast →→ Make money harder to get →→ Cool Down Demand.
      - 24.2
        
        Change the Money Supply (How much cash is around)
        
        How they do it:
        
        Print more money (called "printing the press").
        
        Buy back government bonds (gives banks more cash to lend).
        
        Encourage banks to lend more (remove restrictions).
        
        The Result:
        
        More money available →→ More borrowing and spending \rightarrow **Total Demand goes UP** \(\rightarrow Output goes up.
        
        Change the Interest Rate (The cost of borrowing)(This is the main tool used today)
        
        If Central Bank RAISES rates: (This is Contractionary)
        
        Borrowers hurt: Loans cost more, so people have less money to spend.
        
        New loans cost more: Businesses and people stop borrowing for big purchases.
        
        Savers win: People save more because they earn better interest (but this means they spend less).
        
        Exchange Rate effect: Higher rates make the currency more valuable →→ Exports get more expensive →→ Net exports fall.
        
        Overall Result: Total Demand goes DOWN.
        
        If Central Bank keeps rates steady for a long time:
        
        Creates certainty →→ Businesses feel safe to plan and invest.
        
        Change the Foreign Exchange Rate
        
        How they do it: The government tells the Central Bank to influence the currency's value.
        
        Why they do it: To make the currency cheaper.
        
        The Result: A cheaper currency makes exports cheaper for other countries to buy →→ Exports go UP.
        
        Simple Summary to remember:
        
        Money Supply: Print more money = More spending.
        
        Interest Rates: Raise rates = Less spending (and vice versa).
        
        Exchange Rates: Lower the value of money = More exports.
- - - - Reasons:
        Prevents wasted resources
      - Criteria:
        Unemployment Rate
    - - Reasons:
        Preserves purchasing power
      - Criteria:
        Consumer Price Index/Inflation Rate
    - - Reason:
        Avoid debt crises
      - Criteria:
        Current Account Balance as a % of GDP & Stable Exchange Rate
    - - Criteria:
        Gini Coefficient
      - Reason:
        Reduces poverty and prevents social unrest
    - - Full employment and stable prices
      - Full employment and balance of payments
      - Economic growth and environmental sustainability
- - - - UNEMPLOYMENT
        
        TYPES
        
        CYCLICAL
        
        FRICTIONAL
        
        STRUCTURAL
        
        SEASONAL
        
        Slower economy
        
        POLICY TO REDUCE
        
        SUPPLY SIDE POLICY
        
        Better education, higher literacy rate
        
        offer specialised courses suiting the country's economic demands
        
        FISCAL POLICY
- - - - Inflation- sustained increase in the general price level of an economy
      - Causes:
        
        Demand-pull → ↑ AD > ↑ AS
        
        Cost-push → ↑ production costs
        
        Built-in → ↑ wages → ↑ costs → ↑ prices
      - Effects
        
        ↓ Purchasing power
        
        ↓ Value of savings
        
        ↑ Uncertainty
        
        Hurts people on fixed incomes
        
        Exports become less competitive
    - - Deflation- sustained decrease in the general price level
      - Causes
        
        ↓ Demand
        
        Lower production costs
        
        Tight monetary policy
      - Effects
        
        ↑ Real value of debt
        
        People delay spending
        
        ↓ Investment & economic growth
        
        Benefits savers but hurts borrowers
    - - Monetary → ↑ interest rates
      - Fiscal → ↑ taxes / ↓ government spending
      - Supply-side → ↑ productivity & competition
- - - - EXAMPLES
        → Increase LRAS
        → Increase economic growth
        → Reduce unemployment
        → Reduce inflation
    - - Lower income tax → incentive to work ↑
      - Lower corporation tax → investment ↑
      - Deregulation → business costs ↓
      - Privatisation → efficiency ↑
    - - Education & training → skills/productivity ↑
      - Infrastructure → business costs ↓
      - Healthcare → healthier, more productive workers
      - R&D subsidies → innovation & productivity ↑
    - - LRAS GRAPH 📈
        
        Y-axis: Price Level
        
        X-axis: Real GDP
        
        LRAS = vertical
        
        LRAS shifts RIGHT → productive capacity ↑
- - - - Equitable : fair based on ability to pay
      - Convenient:easy to understand, pay and collect
    - - budget deficit: spending > revenue
      - balanced budget: revenue = spending
      - budget surplus: spending < revenue
      - formula: budget balance = revenue - spending
    - - direct taxes: paid straight from income/wealth
      - indirect taxes: added to goods and services
      - progressive: high income -> high tax rate%
      - proportional: same tax rate % for everyone regardless of income