Macroeconomics and Government Policy - dummies

Macroeconomics and Government Policy

Part of Economics For Dummies Cheat Sheet (UK Edition)

Economists use gross domestic product (GDP) to keep track of how an economy is doing. GDP measures the value of all final goods and services produced in an economy in a given period of time, usually a quarter or a year.

A recession occurs when GDP is decreasing. An expansion occurs when GDP is increasing.

The unemployment rate measures what fraction of the labour force cannot find jobs. The unemployment rate rises during recessions and falls during expansions.

Anti-recessionary economic policies come in two flavours:

  • Monetary policy uses an increase in the money supply to lower interest rates. Lower interest rates make loans for cars, homes, and investment goods cheaper, which means consumption spending by households and investment spending by businesses increase.

  • Fiscal policy refers to using either an increase in government purchases of goods and services or a decrease in taxes to stimulate the economy. The government purchases increase economic activity directly, while the tax reductions are designed to increase household spending by leaving households more after-tax monies to spend.