Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

MacroEconomics > 11 - Economic Performance > Flashcards

11 - Economic Performance Flashcards

1
Q

What is the ONS?

A

An independent body who collate data about things which affect the UK. They report on inflation figures, and economic growth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What challenges has the UK economy faced?

A

Covid-19, Global Financial crisis.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the current rates of economic growth?

A

0.1-0.3%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is Economic Growth?

A

The growth of the total value of goods and services in an economy year on year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the primary sector?

A

Involves extraction of raw materials.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What % of GDP did the primary sector make up in 1952, compared to now?

A

1952 - 8.09%. 2016 - 1.30%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the secondary sector?

A

Involved transforming raw materials into a finished product. e.g. Textiles, Manufacturing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What % of GDP did it make up in 1952, compared to now?

A

1952 - 38.19%. 2016 - 15.11%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the tertiary sector?

A

Involves service and retail, and the provision of goods. e.g. financial institutions, schools, Hotels.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What % of GDP did it make up in 1952, compared to now?

A

1952 - 53.72%, 2016 - 83.59%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the quaternary sector?

A

Intellectual services, research and development. e.g. Programmers, IT services, Artists.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What fuels short term economic growth?

A

Changes in Aggregate Demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How can firms increase output in the short run?

A

Increasing output, by fully utilising all factors of production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Which diagram shows short run economic growth?

A

PPF Diagram.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Which Factors affect Aggregate Demand?

A

Consumption, Investment, Government Spending, Imports, Exports.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What do further increases of Aggregate Demand lead to?

A

Higher Inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Which supply side factors lead to short run economic growth?

A

A fall in money supply, A fall in taxes imposed on firms.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the trend growth rate?

A

The rate at which output can grow on a sustained basis without putting pressure on inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the current trend growth rate of the UK?

A

Below 2%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What has happened to the number of economically inactive people?

A

It has increase, as people have left the workforce since COVID.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are the causes of Long Run Economic Growth?

A

Improvements in Technology, Investment, Increase in the size of the labour force, Improvements in productivity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What do supply side reforms do to the economy?

A

Increase labour productivity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How does Aggregate Demand play a role in Long Run growth?

A

Firms will only produce more goods or services if there is enough demand to absorb extra output.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What does the neoclassical growth theory state?

A

A sustained increase in investment increases growth rate temporarily, Ratio of capital to labour goes up, product of capital declines.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the weakness of the neoclassical theory?

A

It doesn’t explain why technological progress occurs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What does the new growth theory state?

A

It says there are three main sources of technological progress, which explains long run growth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What are the three factors stated in the new growth theory?

A

Profit seeking research, openness to foreign idea, accumulation of human capital.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What are the benefits of economic growth?

A

Increases standard of living, provides new, more environmentally friendly technologies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What are the disadvantages of economic growth?

A

Uses up finite resources, pollution and environmental degradation, Destroys local culture and community, widening inequality.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is the economic cycle?

A

The way an economy moves through the four stages of boom, slowdown, recession, and recovery.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What are the characteristics of a Boom?

A

High inflation, High consumer spending, low unemployment, low interest rates, high consumer confidence, higher taxes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are the characteristics of a recession?

A

High unemployment, high taxation, low consumer confidence, high business failure, low tax revenue, low inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What are the characteristics of a slowdown?

A

Decreasing consumer confidence, decreasing spending, increasing business failures, falling demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What are the characteristics of a recovery?

A

Rising consumer confidence, rising consumer spending, rising business start ups, decreasing unemployment, low interest rates.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are the causes of changes in the economic cycle?

A

Fluctuations in Aggregate Demand, Supply side factors, outside shocks, multiplier theory.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What do output gaps measure?

A

Real output, compared to the trend output level.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What is the output gap?

A

A gap between the change in demand and output levels.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

What can a positive output gap lead to?

A

Cost - push, or demand - pull inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What can a negative output gap lead to?

A

A lower price level, a rise in unemployment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

What happened to the UK’s output gap between 2000-2008?

A

The UK had a positive output gap, which accompanied a booming economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

What happened to the output gap in 2008?

A

It was negative, after the global financial crisis.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What has happened to real incomes since 2008?

A

They have fallen, due to consecutive pay freezes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

What are the examples of demand side shocks?

A

Economic Downturn in a country’s major trading partner, tax increases, cuts in state benefits, Financial crises, rise in unemployment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

What are the examples of supply side shocks?

A

Steep rise in oil and gas prices, natural disasters, conflict, production technology, lockdown of citizens.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

What is a shock?

A

An unexpected event that affects the economy, or economic growth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

What is an endogenous shock?

A

An unexpected event, which is internal.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

What are exogenous shocks?

A

An unexpected event happening outside of the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

What are the examples of endogenous events?

A

Changes in income of a country, economic growth, availability of credit, conflict, extreme weather.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What are the examples of exogenous events?

A

Fall/rise in global oil prices, migration levels rise/fall. Health crises, war, global recession.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

What is the criteria of being officially unemployed?

A

Of Working age, willing and able to work, actively seeking work.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

How is unemployment measured?

A

The Labour Force survey, which asks households to self identify as employed, unemployed, or economically inactive.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What are periods of high unemployment linked to?

A

Contraction of economic growth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

What has unemployment stayed above in the last 50 years?

A

3.5%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

What can the national unemployment rate hide?

A

Regional and local variations, variations in gender, age, ethnicity, doesn’t say duration of joblessness.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What has the unemployment rate been compared to other G7 nations?

A

The UK has never had the highest unemployment rate in the G7, and has a similar rate to Canada, and the USA.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

What is the difference between long term unemployment and mass unemployment?

A

Long term unemployment is people who have been unemployed for 12 months or more. Mass unemployment is where 1 in 10 people at least are out of the Labour Force.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

What is Hidden Unemployment?

A

People who don’t have jobs, and aren’t actively looking for work, but are willing and able, so are not counted in the official rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

What are the examples of hidden unemployment?

A

Students, Stay at home parents, people unable to work due to disability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

What does Structural unemployment result from?

A

The structural decline of industries unable to adapt, when there is changing demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

What does technological unemployment result from?

A

Successful growth of new industry, using labour saving technology.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

What is an example of structural unempoyment?

A

Changes in technology leading to changes in the pattern of demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What does growth of solar panels lead to?

A

Job losses when coal power stations shut down.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

Why can structural unemployment be hard to separate from other causes of unemployment?

A

Changes in Aggregate demand can be hard to measure.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

What happened to manufacturing between 1993-2008?

A

Manufacturing output grew, manufacturing employment fell.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

What does cyclical unemployment believe?

A

A lack of aggregate demand for goods and services is a cause of persistent unemployment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

What does cyclical unemployment lead to?

A

A downturn in the economic cycle, and says that the economy could settle at an under-unemployment equilibrium.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

Is cyclical unemployment voluntary or involuntary?

A

Involuntary, as it’s not caused by workers, and people shouldn’t be blamed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

What are the causes of cyclical unemployment?

A

The economic cycle, aggregate demand decreases, so workers have to be laid off.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

What does deficient aggregate demand lead to?

A

The economy producing inside the PPF.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

What are the causes of hidden unemployment?

A

Many long term unemployment give up actively searching for work. A large cohort of people are sidelined onto benefits. A growing number of people are unemployed, as they care for elderly relatives.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

Why may unemployment figures not be accurate?

A

LFS can’t always be representative of the whole UK, there is always scope for error. Measured unemployment excludes economically inactive people. Unemployment isn’t the same as under employment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

What are the examples of seasonal unemployment?

A

Farming, Tourism, Retail, Hospitality, Construction, Tuition.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
73
Q

What are the causes of structural unemployment?

A

New jobs require new skills, unaffordable housing, employer discrimination, erosion of skills, welfare system.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
74
Q

How can frictional unemployment be reduced?

A

By making information on jobs more available, making job search more affordable.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
75
Q

What are the causes of frictional unemployment?

A

School and college leavers entering labour market, people searching for work following a career change, early retired people returning to the labour market, mothers returning.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
76
Q

What type of unemployment is workers being made redundant from a steel plant during a downturn in construction?

A

Cyclical.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
77
Q

What type of unemployment is a graduate who spends six months searching for work after leaving university?

A

Frictional.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
78
Q

What type of unemployment is a mother actively searching for work, unable to accept a job offer due to childcare?

A

Structural.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
79
Q

What type of unemployment is an unemployed farmer finding it hard to find new work?

A

Structural.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
80
Q

What type of unemployment is people working in aircraft freight businesses losing their jobs due to a contraction in trade?

A

Cyclical.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
81
Q

What is real wage unemployment?

A

Unemployment caused by wages being too high relative to the productivity of workers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
82
Q

Why may firms be unwilling to hire workers at current wage rates?

A

They believe workers aren’t worth that much.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
83
Q

What do classical economists believe?

A

That unemployment would disappear if wages were adjusted downward, as workers would be willing to work for less.

84
Q

What do Keynesians believe is true, in terms of wages?

A

Wages are ‘sticky’ because of long term labour contracts, and trade unions.

85
Q

What are the reasons for voluntary unemployment?

A

Pursuing education, leisure, taking time off for personal interests.

86
Q

What are the reasons for involuntary unemployment?

A

Recession, Job market conditions, lack of jobs in a specific industry.

87
Q

What is the Natural rate of Unemployment?

A

The level of unemployment that exists in an economy when operating at full potential.

88
Q

What are the components of NRU?

A

Structural unemployment, Frictional unemployment.

89
Q

What are the consequences of unemployment?

A

Reduces international competitiveness, higher business taxes, shrinks the size of the PPF curve, Mental Health.

90
Q

How does unemployment reduce international competitiveness?

A

It reduces incentives for firms to invest in state of the art technology, which leads to increased export competitiveness.

91
Q

How does unemployment lead to higher business taxes?

A

Businesses will have to fund increased welfare payments, which leads to lower investment.

92
Q

How does unemployment shrink the size of the PPF?

A

The economy starts adjusting to a new amount of employees, so inactive workers are seen as unemployable.

93
Q

How does unemployment lead to lower mental health?

A

Lower living standards can lead to unemployed people feeling marginalised, and self esteem is reduced. Reduction in quality of diet.

94
Q

What are the government policies to reduce unemployment?

A

Improving geographical immobility of labour, Improving occupational mobility of labour, reducing employment search periods, supply side policy.

95
Q

How does improving geographical immobility reduce unemployment?

A

Makes it easier for families to move from one region to another.

96
Q

How does improving occupational immobility reduce unemployment?

A

Improving OM by providing retraining schemes, improving information about jobs, so people can find jobs outside their skill set.

97
Q

How does reducing search periods reduce unemployment?

A

JSA attempted to reduce search periods between jobs, and creates an incentive for unemployed to accept lower wages.

98
Q

How does supply side policy reduce unemployment?

A

De-industrialisation created conditions for service industries to grow, to replace manufacturing.

99
Q

What was inflation in February 2024?

A

3.4%

100
Q

Why did inflation in the UK fall in 2024?

A

A slowdown in food price rises.

101
Q

What has food inflation been in the UK in the last 2 years?

A

25%.

102
Q

What is inflation?

A

A sustained rise in an economy’s general price level.

103
Q

What is deflation?

A

A sustained period when the general price level for goods and services falls.

104
Q

What is disinflation?

A

Consumer prices still rising at a slower rate, because of a drop in the rate of inflation.

105
Q

What is hyperinflation?

A

Extremely rapid inflation, result of mass money printing by government.

106
Q

What is the consumer price index?

A

A weighted index which measures the average change in the price of products from month to month.

107
Q

Which items were added to the ONS basket in 2024?

A

Air fryers, vinyls, rice cakes, gluten free bread, spray oil.

108
Q

What is Stagflation?

A

A mixture of a stagnating economy and high inflation.

109
Q

What are the causes of inflation?

A

Falling exchange rates, availability of credit, increased energy prices, increased VAT, increased exports, economic boom.

110
Q

What is cost push inflation?

A

A rising price level caused by an increase in the costs of production.

111
Q

What are the causes of cost push inflation?

A

Rising labour costs, depreciation in the value of currency, higher global prices for raw materials, increase in indirect taxes,

112
Q

What does cost push inflation cause?

A

A negative output gap.

113
Q

What does the cost push inflation graph show?

A

A contraction of the AD curve due to rising prices, firms are less willing to supply due to high cost.

114
Q

What is demand pull inflation?

A

A rising price level caused by an increase in AD, where the economy grows too quickly, and services outstrip supply.

115
Q

What are the causes of demand pull inflation?

A

Economic growth, low interest rates, increase in money supply, tax cuts, increased spending.

116
Q

What does demand pull inflation cause?

A

A positive output gap.

117
Q

What does the demand pull inflation diagram show?

A

An economy which uses up spare capacity, but overuses factors of production.

118
Q

Who is Milton Friedman?

A

A 20th century economist who supported free market policies, and came up with the theory of monetarism.

119
Q

What does monetarism argue?

A

The money supply plays a crucial role in determining the rate of inflation.

120
Q

What happens if money supply increases rapidly, according to monetarism?

A

It leads to inflation, as there is too much money chasing too few goods.

121
Q

What does monetarism say about fiscal policy?

A

It is critical of using it to manage the economy, as it argues fiscal policy is unpredictable, and leads to economic instability.

122
Q

What is the equation for the quantity theory of money?

A

MV=PQ.

123
Q

What do the different components stand for in the quantity theory of money equation?

A

M = Money Supply. V = Velocity of Money.
P = Price Level. Q = Quantity of goods and services produced.

124
Q

What are the problems with high inflation?

A

Erodes the value of money, less long term investment, leads to unemployment, higher interest rates, higher wage demands, uncertainty and instability.

125
Q

What has the rate of inflation been in the UK in the last 35 years?

A

It has stayed on or around 2% for most of the period of the last 35 years.

126
Q

What happened to inflation in the 1990s and 2008?

A

It increased while the economy was going into recession.

127
Q

What happened to inflation in 2022?

A

It increased to over 11%, following covid-19 and the war in Ukraine.

128
Q

What are inflation expectations?

A

What people and businesses expect inflation to happen to consumer prices in the future. This can cause higher wage claims, and a wage price spiral.

129
Q

What is the effect of CPI being a weighted index?

A

Housing and household services account for 30% of the overall inflation calculation, and food and drink accounts for less than 10%.

130
Q

What are the limitations of the consumer price index?

A

Not fully representative of all households, may hide true cost of goods, inaccuracies in data, many services in the digital economy don’t have a price, rising quality of products may not be fully reflected in the price.

131
Q

What are the challenges of measuring inflation?

A

The basket may not always represent what people are buying, substitution bias, quality adjustments, geographic variation, demographics.

132
Q

Who are the winners of high inflation?

A

Workers with strong bargaining power, producers, debtors.

133
Q

Who are the losers of high inflation?

A

Workers in low paid jobs, lenders, retired people, savers if real returns are negative.

134
Q

What has happened to inflation in China?

A

Deflation due to a contraction in demand, where spending by consumers fell despite the lunar new year.

135
Q

Why are economists concerned about China’s inflation?

A

They may start to rely on demand from other countries.

136
Q

What are deflationary expectations?

A

Downward inflation, people spend less today, as they expect cheaper prices tomorrow.

137
Q

What is the importance of the inflation rate?

A

Affects competitiveness in international trade, imbalances in trade if one country has high inflation, and another has low inflation, Problems with debt crises.

138
Q

What was the UK’s inflation rate, compared to the G7, from 2016?

A

The UK’s was the same as Germany and the USA from 2016 to 2020. The USA’s inflation rate rose more quickly than the UK’s and Germany’s, following the pandemic.

139
Q

What are the benefits of high inflation for the government?

A

Fiscal drag, more tax revenue for the government, reduces value of government debt, negative interest rate on government debt, could help businesses make more profit.

140
Q

What are the costs to the government to high inflation?

A

Pressure to raise the value of welfare benefits, causes slowdown of real GDP growth, lower tax revenue, increased interest rates, government borrowing is more expensive, worsening of international competitiveness.

141
Q

What is the wage price spiral?

A

Rising inflation, falling real incomes, workers bid for improved wages, labour costs increase, firms raise their prices, rising inflation.

142
Q

What are the policies to tackle inflation?

A

Interest rates, tax rises, buying government bonds, more flexible labour market, decreased trade union power, quantitative easing.

143
Q

What are the effects of increased interest rates?

A

More expensive to borrow, people are discouraged from making big purchases, decrease in Aggregate demand, fall in general price level.

144
Q

What is the effect of trade union reform?

A

Makes it harder for trade unions to go on strike, collective bargaining power is reduced, less wage price increases, avoid wage price spiral, less cost increases for businesses.

145
Q

What are the consequences of deflation?

A

People postpone big ticket item buying, erodes business confidence, triggers recession, negative multiplier effect, credit crunch.

146
Q

What policies can you use to avoid deflation?

A

Lower interest rates, fiscal stimulus, lower value of exchange rate, higher taxes on savings.

147
Q

How do lower rates of interest cause inflation?

A

Encourages demand, expands supply of credit in the banking system.

148
Q

What happens if people expect the rate of inflation to be high next year?

A

They behave in an inflationary way now, and deliver high inflation next year.

149
Q

What happens if people expect the inflation rate to fall?

A

They behave in a way that allows low inflation to be achieved.

150
Q

What is inflation psychology?

A

The idea that many groups in society with strong bargaining positions, such as home owners, have done well with inflation, and want it to continue.

151
Q

What happened between 1997-2007?

A

The government was able to convince people that inflation would be low, making it easier to control inflation.

152
Q

What used to be the main cause of cost push inflation in the UK?

A

Rising wages, public sector workers, bankers, footballers, business executives.

153
Q

What is the current cause of cost push inflation?

A

Rising prices of food, energy, raw materials.

154
Q

What happens when the global economy is doing well?

A

The UK imports inflation from goods in the rest of the world, leads to price of imported food and raw materials.

155
Q

What happens when the world economy is suffering?

A

Pressure on inflation is reduced, could lead to deflation or disinflation, because of falling worldwide demand for UK exports.

156
Q

What does an American downturn mean for the UK?

A

Downward pressure on the UK inflation rate.

157
Q

Why did UK inflation reduce in the long term?

A

Reduced as a result of falling prices of manufactures goods from China.

158
Q

What are the policies to control inflation in the UK?

A

Higher interest rates, lower indirect taxes, subsidising energy bills, increase in direct taxes.

159
Q

How do higher interest rates lower inflation?

A

Increased cost of borrowing, decreased spending, AD shift inward. Risks causing a recession.

160
Q

How do lower indirect taxes cause lower inflation?

A

Is an extra cost for firms, so reduces cost for consumers. Suppliers may not pass on the tax cut.

161
Q

How does subsidising energy bills cause lower inflation?

A

Lowers bills, causing people to spend less on energy, offsets high global high price of energy. Short-term and very expensive.

162
Q

How do increases in direct taxes cause lower inflation?

A

Less disposable income, inward shift of AD. Real disposable incomes are hit.

163
Q

What is the Phillips Curve?

A

An economic model showing the inverse non-linear relationship between the unemployment rate and the rate of inflation.

164
Q

Who was the Phillips curve proposed by?

A

AW Phillips in 1958, to show the relationship between inflation and unemployment.

165
Q

What does U1-P1 show on the Phillips curve?

A

Unemployment is high, inflationary pressure is weak.

166
Q

What does U2-P2 show on the Phillips curve?

A

Significant fall in unemployment, small rise in inflation, spare capacity is being used up.

167
Q

What does U3-P3 show on the Phillips curve?

A

Unemployment falls further, wage pressures start to accelerate, gradient of curve steepens.

168
Q

What does U4-P4 show on the Phillips curve?

A

Unemployment falls to low levels, rise of significant inflation increases. Likelihood of a positive output gap, shortages increase in wage inflation, faster rise in consumer prices.

169
Q

When does the trade off become infavourable?

A

At U4-P4, because inflation is accelerating, and the central bank usually starts increasing interest rates.

170
Q

Why is there low inflationary pressure with high unemployment?

A

Negative output gap, balance of wage negotiation power goes towards employees, real spending power is depressed.

171
Q

Why is there high inflation with low unemployment?

A

Firms compete for workers, upward pressure on wages and prices, shortage of inputs - cost push inflation.

172
Q

What was the balance between inflation and unemployment between 2008-2012?

A

Rising unemployment after financial crisis, low inflationary pressure.

173
Q

What was the balance between 2013-2015?

A

Falling unemployment, falling inflation.

174
Q

What was the balance between 2016-2019?

A

Falling unemployment, rising but low inflation.

175
Q

What was the balance between 2020-2023.

A

High inflation, Low unemployment.

176
Q

What are the challenges to the Phillips curve?

A

Was accepted in 1960s and 70’s, USA and other developed nations experienced high inflation and high unemployment at the same time. Stagflation led to some economists stating that the Phillips curve wasn’t a reliable guide to economic policy.

177
Q

What is the expectations-augmented Phillips curve?

A

Shows the relationship between inflation and unemployment. If people expect inflation to be high, inflation will be higher for a given rate of unemployment in the labour market.

178
Q

What does U3-P3 mean on the EA Phillips curve?

A

Higher expected inflation.

179
Q

What is the NAIRU?

A

Non-accelerating inflation rate of unemployment below which the rate of inflation might be expected to accelerate.

180
Q

Which factors affect NAIRU in the economy?

A

Relative wage bargaining power, factors which affect structural unemployment, Globalisation, migrant workers.

181
Q

How does Wage bargaining power affect NAIRU?

A

Workers are able to use collective bargaining power to demand higher wages.

182
Q

What is an example of wage bargaining power affecting NAIRU?

A

Labour shortages in public sector - health and social care, increased bargaining power. Long term - Fall in unionisation.

183
Q

Which factors affect structural unemployment?

A

Skills gap, High childcare costs, transport costs impede mobility.

184
Q

How does globalisation and migrant workers affect NAIRU?

A

Causes decreased pricing power of businesses, eases shortages in skilled labour.

185
Q

What % of the labour force does NAIRU make up?

A

4.5%.

186
Q

What is Stagflation?

A

Stagnant or negative economic growth, rising unemployment, high and rising inflation.

187
Q

What is the wage price spiral?

A

Workers bid for higher wages, as real incomes are eroded by fast/rising prices.

188
Q

What was average wage inflation between 2001-2007?

A

2.7% per year.

189
Q

What was average wage inflation between 2008-2009?

A

Fell by 2.3%.

190
Q

What was average wage inflation between 2010-2019?

A

Rose between 0-4%.

191
Q

What was wage inflation in 2020?

A

Fell by 1%.

192
Q

What was average wage inflation between 2021-2023?

A

Rose by 9%.

193
Q

Which policies can help achieve an inward shift in the Long Run Phillips Curve?

A

Improve occupational mobility of the labour force, attract more people into searching for work, reduce occupational mobility, improve labour productivity.

194
Q

How does improving occupational mobility help achieve an inward shift?

A

Decreases the natural rate of unemployment, such as more education and training.

195
Q

How does attracting more people into the search for work help achieve an inward shift?

A

Welfare system, punish people in order to claim benefits. Income tax cuts, more job information.

196
Q

How does reducing occupational mobility help achieve an inward shift?

A

Improve transport infrastructure, more affordable housing, improve communications infrastructure.

197
Q

How does improving labour productivity help achieve an inward shift?

A

Work incentives, profit sharing schemes, training on how to use software.

198
Q

Which policies cause the Phillips Curve to shift or flatten?

A

Supply side policies, Labour market reform, International trade.

199
Q

How do supply side policies cause the Phillips Curve to shift?

A

Aimed at improving productive capacity - Infrastructure investment, education. Increase output potential of an economy, flattens Phillips curve.

200
Q

How does labour market reform cause the Phillips curve to flatten?

A

Improve work incentives, boosting inward migration of skilled workers, improving labour mobility, doesn’t create extra inflation.

201
Q

How does international trade cause the Phillips curve to flatten?

A

Increased overseas trade leads to more contestability, lower prices for goods and services - lower inflation, flatter Phillips curve.

202
Q

What does a shift in AD cause, and lead to?

A

Increases output, causes inflationary pressure. Increases inflation, decreases unemployment.

203
Q

What does a derived demand for labour lead to?

A

Movement along P curve from A to B, workers adjust expectations, demand higher wages, increasing costs of production. Causes inward shift from SRAS 1 to SRAS 2.

204
Q

How does an inward shift cause more inflationary pressure?

A

Upwards shift of the SRPC, increasing inflation, unemployment returns to NRU.

205
Q

What does higher inflation at the NRU lead to?

A

Creates the LRPC, is the same as LRAS, all factors of production are fully utilised. Stable inflation rate if there are no external shocks.

MacroEconomics (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions