theme 4

• the government can use fiscal policy to influence the economy by changing tax rates, spending on public services or transfer payments
• when AD falls below potential GDP, the government will increase its expenditure through expansionary fiscal policy
• Financial markets


  Any place or system that provides buyers & sellers the means to exchange goods/services & trade financial instruments
• fiscal policy is used when there are fluctuations in aggregate demand (AD)
• The government uses monetary policy to control inflation and interest rates.
• Financial markets


  • They facilitate saving: storing money for future use is essential for households & firms. It also provides a pool of money that financial institutions can lend i.e. one person's savings is another person's borrowing
  • They lend to businesses & individuals: access to credit is a key requirement for economic growth & development. Being able to borrow money speeds up consumption by households & investment by firms. It also allows households or firms to purchase assets & pay them off over an extended period of time e.g. mortgages on home purchases
  • They facilitate the exchange of goods & services: each purchase of goods/services requires the movement of money between at least two parties. Financial markets provide multiple ways for this exchange to happen including phone apps (Google Pay), debit cards, credit cards & bank transfers
  • They provide forward markets in currencies & commodities: forward markets are also called futures markets. They provide some price stability in commodity markets & enable investors to make a profit by speculating on future prices
  • They provide a market for equities: equities are shares in public companies that are listed on stock exchanges around the world. Financial markets facilitate both long term investment & speculation by providing platforms which connect buyers & sellers e.g. E-Trade
• Financial markets include bonds, equities, international currencies, & derivatives
• A recession is when there are two consecutive quarters of negative economic growth.
• Inflation is an increase in prices over time.
• when AD is above potential GDP, the government will decrease its expenditure through contractionary fiscal policy