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Macro Economics > 4.2.3 Economic Performance > Flashcards

4.2.3 Economic Performance Flashcards

1
Q

Short run growth

A

The percentage increase in a country’s real GDP, measured annually (increase in AS)

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2
Q

Long run growth

A

When the productive capacity of the economy increases and refers to the trend rate of growth of national output over time (increase in AS)

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3
Q

Positive output gap

A

When actual growth is greater than trend growth (boom)

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4
Q

Negative output gap

A

When actual growth is below trend growth (bust)

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5
Q

How can output gaps be shown using an AD AS diagram

A

Draw LRAS SRAS and show shifts in AD, an outward shift shows a positive output gap and an inward shift a negative output gap

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6
Q

Pros of economic growth for consumers

A
  • average consumer income increases

* consumers feel more confident which leads to more consumption and better living standards

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7
Q

Cons of economic growth for consumers

A
  • can cause inequality
  • higher demand pull inflation
  • more effort spent trying to find the best deal (shoe leather costs)
  • benefits of consumption don’t last (law of finishing returns)
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8
Q

Pros of economic growth for government

A

•government budget may improve as there is higher taxes

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9
Q

Cons of economic growth for government

A

Might increase spending on healthcare if demerit goods are consumed

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10
Q

Costs of economic growth for firms

A

Menu costs as a result of inflation

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11
Q

Benefits of economic growth to firms

A
  • more profit leads to more investment
  • improved technology and lower costs In long run
  • growth leads to economies of scale
  • more competition makes them more efficient and more sales opportunities
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12
Q

Costs of economic growth for living standards

A

•could damage the environment due to increase in negative externalities

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13
Q

Benefits of economic growth for living standards

A
  • could lead to greener technology
  • consumer have more goods and services of a higher quality
  • public services improve
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14
Q

Causes of cyclical instability

A
  • unsustainable growth
  • excessive growth in credit and levels of debt
  • asset price bubbles- when investors panic sell stocks
  • destabilising speculation
  • herding- people copying economic agents
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15
Q

Different types of unemployment

A
  • structural
  • frictional
  • seasonal
  • cyclical
  • real wage
  • technological
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16
Q

Structural unemployment

A

Long term decline in demand for the goods in an industry, which cost jobs (coal miners)

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17
Q

Frictional unemployment

A

Time between leaving one job and looking for another

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18
Q

Seasonal unemployment

A

Jobs depending on the season (ice cream man)

19
Q

Cyclical unemployment

A

Lack of demand for goods and services, usually in a recession

20
Q

Real wage unemployment

A

Wages above the market equilibrium may cause unemployment because supply of labour exceeds demand

21
Q

Technological unemployment

A

When people are replaced by machines

22
Q

Consequences of unemployment

A
  • standard of living may fall
  • psychological consequences of losing a job
  • firms have more people to employ so wages fall
  • firms lose profit due to lowered consumption
  • more unemployment benefits given out
23
Q

Natural rate of unemployment

A

The difference between those willing to have a job at current market wage level and those willing and able to.

24
Q

Non- accelerating inflation rate of inflation

A

Inflation doesn’t have a tendency to increase at this unemployment rate.

25
Q

Inflation

A

The sustained rise in general price levels over time

26
Q

Deflation

A

The sustained fall in general price levels over time

27
Q

Disinflation

A

When inflation is still rising but at a slower rate

28
Q

Demand pull inflation

A

When AD is growing unsustainably there is pressure on resources. Producers therefore raise prices

29
Q

Triggers for demand pull inflation

A
  • depreciation in exchange rate (X-M) increases AD
  • fiscal stimulus in the form of lower taxes or more government spending
  • lower interest rates
30
Q

Cost push inflation

A

When firms face rising costs

31
Q

Triggers for cost push inflation

A
  • increase in commodity prices
  • labour becomes more expensive
  • indirect taxes
  • depreciation in exchange rate, imports become more expensive
  • monopolies exploit consumers
32
Q

Effects of inflation on consumers

A
  • those on low fixed incomes are hit hardest due to its regressive affect
  • if consumers have loans the value of repayment is less
  • savings are worth less
33
Q

Effects of inflation on firms

A
  • likely to be high interest rates so investment drops
  • workers might demand higher wages
  • firms may be less price competitive on a global scale
  • unpredictable inflation will reduce business confidence
34
Q

Effects of inflation on the government

A

•will have to increase the value of the state pension and welfare payments because the cost of living is increasing

35
Q

Effects of inflation on workers

A
  • real incomes fall so they have less disposable income

* could be redundancies as firms try to cut their costs

36
Q

When has the UK experienced deflation

A

In April 2015 prices fell by 0.1%

37
Q

Effects of deflation

A
  • lower consumption as they wait to buy goods
  • increasing unemployment
  • makes value of debt greater
  • wages are likely to fall since firms make lower profits
  • even less consumption of the real interest rate increases (interest rates- deflation rate)
38
Q

Quantity theory of money

A

Stated that there is inflation if the money supply increases at a faster rate than national income

MV=PQ

M= money supply
V= velocity of circulation 
P= the price level
Q= real GDP
39
Q

Explain how the quantity theory of money works

A
  • It is argued that V is constant in the short run and Q is independent on money supply
  • when money supply is increased consumers spend more money which causes outward shift in AD
  • this firms a positive output gap which is inflationary
  • as a result more workers are employed so wages increase and so do costs, firms make up for this by putting up prices
  • the real value of money falls and so there is a contraction in demand
  • workers demand higher wages due to inflation which causes a leftward shift in SRAS
  • output is back to equilibrium but price level is higher
40
Q

What is true of a positive output gap?

A
  • AD is increasing faster than AS
  • inflationary
  • actual level of output is greater than potential level of output
41
Q

What is true of a negative output gap?

A
  • AS is greater than AD
  • deflationary
  • actual growth is less than potential
42
Q

Explain the Phillips curve (short run)

A
  • as economic growth increases, unemployment falls

* wages increase and so does consumption leading to an increase in average price level

43
Q

How can the trade off between inflation and unemployment be limited

A

Through supply side policies to reduce structural unemployment which won’t increase average wages

Macro Economics (6 decks)

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