4.2.3 Economic Performance Flashcards
What is short run growth caused by?
Increases in AD
What is long run growth caused by?
Increases in AS
When does a positive output gap occur?
When demand shifts outwards
What are characteristics of a boom?
- High rates of economic growth
- positive output gaps
- full employment
- demand-pull inflation
What are characteristics of a recession?
- Negative economic growth
- Negative output gaps and spare capacity
- demand-deficient unemployment
What is an asset price bubble?
When the price of an asset which is predicted to rise significantly suddenly falls and causes investors to panic and try and sell their assets
What is herding?
Reacting to the behaviour of other economic agents rather than the market
What is cyclical unemployment caused by?
A lack of demand for goods and services
Or
Increases in productivity meaning fewer workers are needed
What are some consequences of unemployment?
- Less disposable income means consumers’ living standards fall
- Loss of skills
- Negative externalities such as crime
- opportunity cost to society (loss of goods and services)
- Government have to spend more on Jobseeker’s Allowance
What is disinflation?
The falling rate of inflation
What are the triggers of demand-pull inflation?
- A depreciation in the exchange rate
- Fiscal stimulus
- Lower interest rates
- Increase in uk exports
When does cost-push inflation occur?
- Labour becomes more expensive
- Indirect taxes
- Depreciation in the exchange rate
- Changes in world commodity prices (raw materials)
What are the effects of deflation?
- Decreases spending
- Makes value of real debt higher as debt does not fall with price
- wages fall as firms make less profits
- worse rates of unemployment
What is the equation of exchange?
MV = PQ
Supply of money x velocity of circulation = price level x quantity of goods sold
What is the difference between short-run growth and long-run growth?
Short run - brings idle resources into production
Long run - increases the economies productive potential
How do we show short-run growth on a graph?
AD shifts right OR SRAS shifts to the right
What demand-side factors determine short run growth?
The components of AD|
C + I + G + (X-M)
What supply-side factors determine short run growth?
- A fall in costs of production
- A fall in taxes imposed on firms
- Increase in subsidies paid to firms
What supply-side factors determine long run growth?
Anything that increases Labour productivity
Eg
- improvements in technology
AND increase of the size of Labour force
How do demand-side factors determine long run growth?
Firms will only produce more goods ad services if their is sufficient demand in the economy to absorb the extra output
What are the costs of economic growth?
- Uses up finite resources such as oil
- Pollution
- Can destroy culture and communities
What are the benefits of economic growth?
- Increases standards of living/welfare
- Greater business confidence
- produces a fiscal dividend and the tax revenues can be used to correct market failures
What is the economic cycle?
The upswing and downswing in aggregate economic activity taking place over 4-12 years
What is a depression?
A severe recession lasting more than 2 years
What is a recession?
Real national output falling for 6 months or more
When was the last recession in the UK?
2008
What is a positive output gap?
When real GDP > productive potential of the economy
What factors cause change in the phases of the economic cycle?
- Fluctuations in AD
- Supply side factors
- Speculative bubbles
What happens to employment in the boom and recovery phases ?
Employment increases
What does a positive output gap mean?
The economy economy temporarily produces a level of output to the right of the LRAS curve and above the normal capacity level of output
Disadv. Of a positive output gap
Because it represents the over us of capacity, it cannot be sustained for long
What are the main UK measures of unemployment?
The claimant count
The Labour Force Survey
What is involuntary and voluntary unemployment?
Involuntary - when workers are willing to work at current market wages but there are no jobs available
Voluntary - when workers choose to remain unemployed and refuse job offers at current market wage rates
What is frictional unemployment?
The transition stage where a worker is unemployed when moving from one job to another
What is structural unemployment?
When a person does not have a sufficient skill-set or the qualifications needed for a job
What is cyclical unemployment?
Unemployment caused by a lack of aggregate demand in an economy (negative output gap)
What causes frictional and structural unemployment?
Supply-side factors
What is real wage unemployment?
Unemployment caused by real wages being stuck above the equilibrium market-clearing real wage
What is the natural rate of unemployment?
The rate of unemployment when the aggregate Labour market is in equilibrium
What does the Labour market diagram look like?
AD AS diagram with employment on X axis and real wage rate on Y axis
What are the consequences of unemployment on the economy?
- less competitiveness
- wasted human capital
- more benefits claimed
What are the advantages of unemployment on the economy?
- downward pressure on wage rates
- reduced inflation
What are the consequences of unemployment on individuals?
Lower standards of living
Engagement in the black economy
MV = PQ
Money supply x velocity of circulation = price level x quantity of output
What is the roel of expectations in the inflationary process?
If people expect that the rate of inflation next year is going to be high, they will behave in an inflationary way now
What are the disadvantages of inflation?
- reduced competitiveness as exports increase in price
- distorted consumer behavior
- distributional effects
What happens to inflation in a positive output gap?
It increases
What diagram MUST be used in an MEO conflict question?
Short Run or Long Run Phillip’s curve
What goes on the Y axis of a Phillips curve?
Inflation rate (%)
What goes on the X axis of a Phillips curve?
What is the relationship between wage inflation rate and unemployment rate?
Stable, inverse and non-linear
WHERE DOES THE LONG RUN PHILLIPS CURVE intersect THE SHORT RUN PHILLIPS CURVE?
Where the rate of inflation = 0
Where there is a natural rate of unemployment (Un)
Explain why monetarists believe there is no trade-off between unemployment and inflation
- AD increases
- Causing demand pull inflation
- Firms have higher revenues
- firms will higher more
- eventually firms and workers will see through the money illusion and see that increases in revenue were nominal (not accounting for inflation)
- So firms will hire less
- unemployment returns to NRU so LRPC is always a straight line from NRU
What are key MEO conflicts?
Unemployment vs inflation
Economics growth vs inflation
Inflation vs controlled BOP
