We will be looking at 2 aspects of the economic cycle, here is an example of an economic cycle graph. We will be analysing the recession, which is the downward growth from the ‘boom’ to the ‘bust’ and the ‘boom’ itself. Recession is continuous negative growth of GDP for 2 quarters (6 months). Direct affects of this would be rising unemployment, a decrease in consumer expenditure, lower investment and therefore a low inflationary pressure. With these factors taken into consideration, a decrease in consumer expenditure would be a direct causation to a lowering of both organisations activity.
The effects of a fall in consumer wealth will be to reduce confidence and consumer spending; equity withdrawal will slow down sharply – this has been a significant contributor to increasing AD in UK). Therefore, falling house prices will cause a fall in AD and is likely to cause a recession. This occurred in 1991 and 1992 when falling house prices caused a recession 2. Reduce House Price Volatility To prevent a house price crash, in the future, the government needs to reduce house price volatility and speculation. For example, the government could try these policies Encourage Fixed Rate Mortgages – Makes mortgages less sensitive to interest rate changes.
Government spending consists of salaries for government employees, defense spending, aid programs, and other cash outflows. Government revenue primarily consists of taxes. When the government spends more than they receive in the form of revenue, a budget deficit occurs. The causes and the implications for long-term economic growth due to a high budget deficit on the economy, along with the role that fiscal and monetary policy plays, will be defined and explained. The development of a increasing budget deficit has been caused by a weak economy and the result of increased government spending in areas such as health care, education, defense spending, low interest rates, lowering taxes, and the increase in welfare and entitlement programs.
Therefore, if MPC and consumer confidence is at a low, consumers will spend less and save more therefore resulting in a decrease in total consumption levels. This consequently will result in an increase in taxation, as there is a decrease in the circular flow of income, meaning governments have to increase taxes in compensation for the lack of spending. Due to this taxation increase the level of real disposable income, or RDI, amongst consumers will decrease and therefore decreasing consumer
In order to combat this deficit spending, taxes are increased to generate more revenue to pay off this spending. In response, consumers will spend less money and save more, thus causing a decrease in consumption and less money in the economy. Soon, there is a decrease in investment because products are not being sold. Prices drop, and the economy lowers into a recession.
The strength of the Aussie dollar impacts on exporting, metal prices effect profits, and a slowdown in the global economy will reduce the demand (particularly from China) for the metal produced in BH. The BH mine recently made 440 employees redundant which had a huge effect on the local economy and saw many families leave the region in search of employment Ageing Population: BH has an ageing population which in the short term has a positive effect through construction of aged
Budget deficit occurs when the spending of a government exceeds that of its financial savings. On the other hand, it means the amount of spending exceeds its income over a particular period of time. Why it is important to understand the impact of budget deficit to the economy is related to whether it is harmful to the economy or not. The issue on budget deficit is important because it is with regards to the government policy and decision making. It reflects on how the country’s government spends efficiently as it is highly correlated to the economic growth.
The demographic dividend is a window of opportunity in the development of a society or nation that opens up as fertility rates decline when faster rates of economic growth and human development are possible when combined with effective policies and markets. The drop in fertility rates often follows significant reductions in child and infant mortality rates, as well as an increase in average life expectancy. As women and families realize that fewer children will die during infancy or childhood they will begin to have fewer children to reach their desired number of offspring. However, this drop in fertility rates is not immediate. The lag between produces a generational population bulge that surges through society.
The Average Supply Curve (ASL) shows the number of workers that can and/or will work at different Average Wage rates. The upward slope is because, at a higher rate, more are willing to work. The type of unemployment found in the UK is disequilibrium-unemployment, which “occurs when there are conditions that prevent the labour-market from reaching its equilibrium”(Blink & Dorton, 2007). This is further broken down into cyclical-unemployment, where the “economy reaches a point of slow/negative growth, and sees a fall in AD”. Possibly because consumers rather save than spend due to the situation of the economy, thus leading to a fall in demands for labour, as firms will slash production, to make minimal profits.
There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy. When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/ or lower taxes. A recession results in a recessionary gap meaning that aggregate demand is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).