Demand Function An equation showing the relationship between the demand for a product and its principal determinants.

Regression Analysis A statistical technique which shows how one variable is related to one or more variables.

Econometrics The branch of economics which applies statistical techniques to economic data.

Leading Indicators Indicators that help predict future trends in the economy.

Barometric Forecasting A technique used to predict future economic trends based upon analysing patterns of time-series data.

Sensitivity Analysis Assesses how sensitive an outcome is to different variable within an equation. What the hell?

Demand-side policy: fiscal and monetary.

Fiscal policy involves the government manipulating government expenditure and tax rates in order to affect or control aggregate demand in the economy. Oh my god. This is so crap. I cannot believe I am saying this about economics, but due to the obvious time constraint I am subject to, this is just crap. Expansionary fiscal policy will involve raising government expenditure or lowering the tax rates. This is to increase aggregate demand and lead to a multiplied rise in national income. A deflationary fiscal policy will involve reduction in government expenditure and rising taxation.

Unemployment and slow growth are due to a lack of aggregate demand, and inflation and a balance of payment deficit are due to excessive aggregate demand.

Fiscal policy Government expenditure and taxation.

Fiscal policy can be used to perform two main functions:

  • To prevent the occurrence of fundamental disequilibrium in the economy. Expansionary fiscal policy can be used to prevent mass unemployment. Likewise, deflationary fiscal policy can be used to prevent excessive inflation.
  • To smooth out the fluctuations in the economy associated with the business cycle. This would involve reducing government expenditure or raising taxes during boom phase of the cycle. This would dampen down the expansion and prevent the economy from overheating, rising inflation and deteriorating balance of trade. During recession phase, as unemployment grew and output declined, the government should cut taxes or raise government expenditure in order to boost the economy.

Discretionary fiscal policy

Deliberate changes in tax rates or the level of government expenditure in order to influence the level of aggregate demand.


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