10 Questions
What is the primary objective of monetary policy with regards to prices?
Achieving low and stable inflation
Which fiscal policy tool is most likely to reduce income inequality?
Progressive taxation
What is the primary objective of monetary policy with regards to employment?
Achieving full employment
Which tool of monetary policy is most likely to decrease the money supply?
Selling government securities
What is the primary objective of fiscal policy with regards to economic shocks?
Stabilization
Which of the following factors is likely to have the most direct impact on intensive economic growth?
Technological progress
Which type of inflation is most likely to occur when there is a shortage of essential goods?
Cost-push inflation
What is the primary goal of monetary policy?
To promote economic stability and low inflation
Which of the following is a measure of inflation?
GDP Deflator
What type of economic growth occurs when there is an increase in inputs such as labor and capital?
Extensive growth
Study Notes
Economic Growth
- Definition: An increase in the production of goods and services in an economy over a period of time, usually measured by the increase in GDP.
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Factors affecting economic growth:
- Technological progress
- Institutional factors (e.g. property rights, rule of law)
- Investment in human capital (e.g. education, healthcare)
- Investment in physical capital (e.g. infrastructure, machinery)
- Natural resources
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Types of economic growth:
- Extensive growth: Increase in output due to an increase in inputs (e.g. labor, capital)
- Intensive growth: Increase in output due to an increase in productivity
Inflation
- Definition: A sustained increase in the general price level of goods and services in an economy over a period of time.
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Types of inflation:
- Demand-pull inflation: Excessive demand for goods and services drives up prices
- Cost-push inflation: Increase in production costs (e.g. wages, raw materials) drives up prices
- Built-in inflation: Expectations of future inflation lead to higher prices today
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Measuring inflation:
- CPI (Consumer Price Index): Measures the average change in prices of a basket of goods and services
- GDP Deflator: Measures the average change in prices of all goods and services in an economy
Monetary Policy
- Definition: The actions of a central bank to control the money supply and interest rates to promote economic growth, stability, and low inflation.
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Tools of monetary policy:
- Open market operations: Buying or selling government securities to increase or decrease the money supply
- Reserve requirements: Setting the minimum amount of reserves commercial banks must hold
- Interest rates: Setting the interest rate at which banks borrow from the central bank
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Monetary policy objectives:
- Price stability: Low and stable inflation
- Full employment: Maximum employment and output
- Economic growth: Promoting sustainable economic growth
Fiscal Policy
- Definition: The use of government spending and taxation to influence the overall level of economic activity.
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Tools of fiscal policy:
- Government spending: Increasing or decreasing government expenditure on goods and services
- Taxation: Increasing or decreasing taxes to influence aggregate demand
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Fiscal policy objectives:
- Demand management: Increasing aggregate demand to boost economic growth
- Redistribution of income: Reducing income inequality through taxation and government spending
- Stabilization: Reducing the impact of economic shocks (e.g. recessions)
Test your knowledge of macroeconomic concepts, including economic growth, inflation, monetary policy, and fiscal policy.
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