11 Economic growth

Question 1

Short-run economic growth

Answer 1

growth based on increased utilisation of unemployed resources

Question 2

Long-run economic growth

Answer 2

growth based on increasing the potential output level of the economy

Question 3

Determinants of short-run growth

Answer 3

• increase in AD or/and increase in SRAS
• called also “actual growth”

Question 4

Determinants of long-run growth

Answer 4

• improvements arise from improvements in quantity of quality of the factors of production

Question 5

Factors that would increase long-run growth

Answer 5

• increase in the labour force
• improvements in labour productivity
• capital investment
• new technology
• education
• government policy

Question 6

Sustainable growth

Answer 6

economic growth that does not compromise the economy’s ability to grow in the future

Question 7

Economic cycle

Answer 7

the repeated pattern go fluctuations in short-run economic growth and how it differs from the trend growth of an economy

Question 8

Recession

Answer 8

two successive quarters of a year where a short-run economic growth is negative

Question 9

Output gaps

Answer 9

the difference between actual growth and trend growth

Question 10

Explanations of the economic cycle

Answer 10

• multiplier-accelerator effect
• inventory cycle
• asset price bubbles
• animal spirits
• herding
• excessive growth in credit
• economic shocks

Question 11

Inventory cycle

Answer 11

changes in inventory levels held by businesses may lead to exaggerated increases or decreases in industrial output - contributing to economic growth

Question 12

Asset price bubble

Answer 12

where a rise in assets’s price becomes self-fulfilling and the price rises beyond the level that normal demand and supply conditions would generate, eventually leading to sharp falls when its price when the bubble is burst

Question 13

Herding

Answer 13

consumer and investor behaviour often moves in similar direction at the same time

Question 14

Main three types of unemployment

Answer 14

• cyclical unemployment
• frictional unemployment
• structural unemployment

Question 15

Cyclical unemployment

Answer 15

unemployment caused by insufficient aggregate demand within the economy

Question 16

Frictional unemployment

Answer 16

unemployment resulting from ‘friction’ due to movements into and out of the job market i.e. occurs when people are between jobs

Question 17

Structural unemployment

Answer 17

unemployment resulting from mismatches between the labour demand for differently skilled labour

Question 18

Which unemployment is caused by demand-side?

Answer 18

cyclical unemployment

Question 19

Which unemployment are caused by supply-side?

Answer 19

frictional and structural unemployment

Question 20

Other types of unemployment

Answer 20

• voluntary unemployment
• involuntary unemployment
• real wage unemployment

Question 21

Voluntary unemployment

Answer 21

where people are unwilling to accept a job at the going wage rate despite there being jobs available

Question 22

Involuntary unemployment

Answer 22

where people are unable to find employment at the current market wage rate

Question 23

Real wage unemployment

Answer 23

unemployment that exists when the real wage is not allowed to fall to the market clearing level where labour demand equals labour supply

Question 24

The natural rate of unemployment

Answer 24

the rate of unemployment that consists of all voluntary structural and frictional unemployment

Question 25

Causes of inflation

Answer 25

• demand-pull
• cost-push

Question 26

Demand-pull inflation

Answer 26

inflation caused by excessively high levels of AD beyond that needed to generate full employment

Question 27

Cost-push inflation

Answer 27

inflation the occurs due to rises in the cost of production incurred by firms

Question 28

Commodity

Answer 28

a homogeneous product that is often uses as a basic input into production