Limitations of Macroeconomic Policy (HSC SSCE Economics): Flashcards

Gov spending displaces private sector economic activity

Fiscal expansion causes inflation → RBA raises rates → crowds out

Budget deficits cause current account deficits

$(X - M) = (S - I) + (T - G)$

Assumes $(S - I)$ stays constant (doesn't in reality)

Expansionary monetary policy only causes inflation long-run

$MV = PT$

Velocity $(V)$ and transactions $(T)$ are fixed

1985

Govs can never run out (issue own currency)