4.2.3 — Economic Performance Flashcards
What are some characteristics of a boom?
- high rates of economic growth
- near full capacity or positive output gaps
- near full employment
- demand-pull inflation
- high confidence
- gov budgets improve
What are some characteristics of a recession?
- negative economic growth
- lots of spare capacity and negative output gaps
- demand-deficient unemployment
- low inflation rates
- gov budgets worsen
What are some costs and benefits to consumers, firms, the government of economic growth?
- Consumers:
Benefits:
- income increases
- high confidence
- increased consumption + QOL
Costs:
- inequality
- demand-pull inflation
- may be harder to find deals
- law of diminishing return
- Firms
Benefits:
- higher profits
- high confidence
- EOS
- more growth in export markets
Costs:
- have to change their prices to meet inflation
- Government
Benefits:
- budget improves
Costs:
- might require more healthcare funding if demerit good consumption increases
What are some causes of cyclical instability?
- excessive growth in credit and levels of debt
Growth financed by public debt is unsustainable - asset price bubbles
I.e houses when price is predicted to rise significantly causing it to be traded more, demand exceeds supply so price rises beyond intrinsic value: the bubble bursts - destabilising speculation and animal spirits
Destabilising speculation leads to change in price level as a result of speculation - herding
The act of reacting to the behaviour of other economic agents rather than the market
What is voluntary unemployment?
This occurs when someone chooses not to work at the current wage rate — may be encouraged in welfare payments which pay better than wages. High income tax may discourage people from supplying their labour
What is involuntary unemployment?
This occurs when people are willing and able to work at the current wage rate but they cannot find work (typically cyclical when there is excess labour — sticky wages can’t fix this)
What is real wage unemployment?
When wages above the market equilibrium may cause unemployment — supply of labour exceeds demand. Classical economists argue that by letting wages fall the equilibrium level would lead to no unemployment
What is the natural rate of unemployment?
Unemployment rate when the labour market is at equilibrium
> includes frictional and structural unemployment and those who don’t have the necessary skills for a job
>AKA NAIRU: non-accelerating inflation rate of unemployment (inflation doesn’t increase at this unemployment rate)
> in the long run, unemployment rates revert to natural rates of unemployment
How might positive and negative shocks affect unemployment?
Positive:
Increase production and reduce unemployment
Negative:
Decrease output and increase unemployment
What does the quantity theory of money state?
That there is inflation if the money supply increases at a faster rate than national income
What is fisher’s equation of exchange and the quantity theory of money?
MV = P x Q(or T)
M= supply of money
V= velocity of circulation
P= price level
Q= quantity of real goods sold
T= transactions
What does Fisher’s equation of exchange argue about inflation?
That increasing the money supply causes inflation as consumers have more to spend (causes right shift in AD). Firms then increase supply in the short run, causing a positive output gap to occur which is inflationary
> wages increase
> costs for firms increase, causing them to up their prices
> this inflationary pressure means the value of money falls
> workers demand higher wages
> output eventually returns to equilibrium but PL is higher
What is the effect of a rising world commodity (I.e oil) price on domestic inflation?
If a global commodity price is to rise, cost push inflation is likely to occur in the UK causing prices to exponentially rise as there is less supply and high cost.
What is the Phillips curve used to represent and explain the short and long term visuals
The trade off between unemployment and inflation.
- In the short run, the Phillips curve is roughly L shaped, showing how as unemployment increases, inflation decreases
- in the long run, the curve is L shaped AKA vertical long run Phillips curve.
It is as the natural rate of unemployment, and there is no trade off between unemployment and inflation
What are the implications on f the short run Phillips curved and long run L shaped Phillips curve for economic policy?
Short run:
- if the Gov tries to lower unemployment, there could be inflationary pressure on the PL
- the economy would suffer from demand deficient unemployment — may encourage the use of demand side policies to tackle unemployment
Long term:
- changes in unemployment rate don’t affect inflation rate, therefore policies can be more flexible
- since there is no demand deficient unemployment in the long run, supply side policies are more likely to be used
