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Notes: Important Nuances and Conditions
General Principles:
- Time Lags: Effects of policy changes (like interest rates) may take months or years to fully impact the economy
- External Shocks: Events such as wars, pandemics, or natural disasters can disrupt these relationships
- Expectations Matter: People's and businesses' expectations about the future can influence how these variables interact
- Global Influences: International trade, global markets, and foreign policies can affect domestic economic outcomes
- Policy Mix: The impact of one variable (e.g., interest rates) can depend on other policies in place (like government spending)
- Nonlinear Effects: Relationships may not always be proportional; small changes can sometimes have big effects, or vice versa
- Short vs. Long Term: Some relationships (like inflation and unemployment) may differ in the short run compared to the long run
- Sector Differences: Some industries or groups may be affected differently by the same economic change
- Unintended Consequences: Policies can sometimes have side effects not captured by simple relationships
Specific Conditions and Exceptions:
Interest Rates & Bond Yields:
- Effects weaken when rates are already very low (near zero)
- May have limited impact during financial crises when credit markets freeze
- Bond yields can be influenced by central bank purchases (quantitative easing)
Inflation:
- Supply shocks (oil prices, natural disasters) can cause inflation that doesn't follow normal patterns
- Very low inflation or deflation can make relationships behave differently
- Inflation expectations often matter as much as actual inflation
Government Spending:
- Effects are stronger during recessions when private sector is weak
- Long-term spending may "crowd out" private investment
- Impact depends on how spending is financed (taxes vs. borrowing)
Exchange Rates:
- Safe-haven currencies (like the Swiss franc) may strengthen during global uncertainty regardless of domestic conditions
- Effects on trade and growth take time as contracts and supply chains adjust
Stock Markets:
- Can be driven by investor sentiment and global events, not just economic fundamentals
- May rise during economic uncertainty if investors expect policy support
- Technology and sector changes can override broader economic trends