AD and AS Flashcards
What are the 5 main objectives for the UK economy?
economic growth, stable prices, low unemployment, balance of payments and fairer distribution of income
What is the target inflation rate?
2%
How is economic growth measured
GDP - as GDP increases more consumers and businesses are buying more goods and services
what are the 2 types of economic growth
short - term and long - term
what can a 6th objective be
balancing their books (so they do not get into serious debt)
Define aggregate demand
all expenditures for the entire economy added together or the sum of all demand in the economy
What is the equation for AD
C+I+G+(X-M)
What are the 4 different types of income
rent, wages, interest and profit
what are the 3 methods of calculating national income
expenditure method, income method and output method
What is the output method
the value added by each enterprise in the production of goods and services is measured
Describe the circular flow of income
households supply the labor. firms pay the households. Households use their wages to buy the goods and services the firms make.
What does the AD curve show
total demand altering as the price level changes
Why is the AD curve downwards sloping
economic agents buy less at higher prices, more at lower prices
What can cause the AD curve to shift
A change in any one of C, I, G, X or M
define unemployment
workers that do not have jobs but are willing and able to work
define employment
all the members of the economy, aged 16 or over, who has completed at least one hour of work in the period being measured
define unemployment rate
The % of the labor force not currently in paid employment
define full employment
level of employment rates where there is no cyclical unemployment
what are the 2 main measures of unemployment
claimant count and labor force survey
what is the LFS
survey of 60,000 households every 3 months
What is the claimant count
monthly count of those seeking unemployment benefits
advantages and disadvantages of the claimant count
+ (bigger than cc, fuller picture of unemployment levels. Good for international comparisons)
- (subject to sampling errors)
advantages and disadvantages of LFS
+ (count is generally more accurate than a survey)
- (many unemployed do not claim due to stigma effect, government is always changing criteria and difficult to compare over time)
which one is the better measure of unemployment levels
LFS
What is frictional unemployment
unemployment caused by the time people take to move between jobs e.g. graduating. relatively short - term
what can cause structual unemployment
Occupational immobility (difficulties in learning new skills), geographical immobility (difficulty in moving regions for a job), technological change, structural change in the economy. Often most long - term and most demoralizing
what is demand deficient (cyclical) unemployment
Occurs when the economy is below full capacity. There is a time lag. Most likely to lead to mass unemployment.
what is classical (real wage) unemployment
wages in a competitive labor market are pushed above the equilibrium. Causes bitterness and disputes.
what are the consequences of unemployment
lost output - financial cost to the government, social effects on the unemployed.
Makes it easier for firms to recruit god workers, keeps inflation low.
what is hysteresis
unemployment breeds unemployment. If someone doesn’t have a job for a long time then employers are reluctant to employ them.
Define AS
total output that producers in an economy are willing and able to supply at a given price level in a given time period
What does AS measure
the volume of goods and services produced each other
what is an LRAS and a SRAS curve
long run AS curve - vertical
short run AS curve - slope upwards
Describe a keynasian AS curve
flat - low output (supply can increase with no change in PL) recession.
curve - higher output/low unemployment (resources more scarce, PL increases) stronger economy.
vertical - max output (inelastic, only PL increases)
What causes a shift in SRAS
same as supply in micro
What causes a shift in LRAS
change in quantity and quality of resources
How do you increase quality of resources
labor - better education
capital - new capital goods
How do you increase quantity of resources
Labor - immigration, increase retirement age
Capital - increase investment
Enterprise - deregulation, privatization
Land - discovery of natural resources
What is real GDP
an inflation adjusted measure that reflects the value of all goods and services produced by an economy in a given year
Why is LRAS inelastic
because it is found at full employment. Fixed at Yfe
What is full employment
the maximum a country is able to produce given its current level of resources
What does recession occur
when GDP decreases for 2 consecutive quarters
What is short run economic growth
increasing production by using up existing resources
What is long-run economic growth
Increasing the capacity of the economy by increasing quantity or quality of the factors of production
When does short run economic growth occur
increases in AD, increase in AS
When does long-run economic growth
LRAS shifts right
What is a negative consequence of cyclical unemployment for consumers
Y has fallen. RDI is lower, a negative output gap has increased, this may create a negative accelerator effect, I falls therefore AD falls.
What is a negative consequence of cyclical unemployment for the government
Government expenditure will have to increase but tax revenue has fallen (less C, less VAT) increasing the budget deficit and higher national debt in the future.
What could be a positive consequence of cyclical unemployment
Ad shifted left so equilibrium may be at a lower PL so there may be higher unemployment means potentially lower wage costs for firms which ultimately may shift AS to the right. Lower wage costs may make UK exports more competitive, meaning AD right and may return to Yfe
How could you evaluate the consequences of cyclical unemployment
Depends on the position of the economy - if on horizontal part of LRAS then PL wont decrease.
Depends on level of government failure in the economy - more failure then they may increase expenditure on wrong things.
What are the consequences of structural unemployment
Not at efficient level of output due to lack of mobility:
- lost output, lower rates of growth than could be achieved.
- therefore lower levels of RDI, less AD, lower business profits then are possible.
- Worse government finances (like cyclical)
- Hysterisis
How do you decrease structural unemployment
Shift AS right through supply side measures
How does full employment benefit an economy
Higher RDI, higher AD, lower budget deficits, lower levels of social problems cused by unemployment
Why can full employment be bad for an economy
shortage of labour, driving up costs of labour therefore cost push inflation, lower business confidence. May include under employment (part time workers/zero hour contracts)
How can you evaluate employment
the type of employment and economy’s position
What are the causes of a negative output gap
AD too low, AS too low
consequences of a negative output gap
- low confidence
- Increased uncertainty
- Lack of economic growth
- unemployed resources
Evaluating a negative output gap
size of NOG, duration, cause (AD decrease may be deliberate), position of economy, are resources efficiently allocated, is it deliberate.
What are the 3 functions of money
- medium of exchange
- Store of value
- Measure of value
- Means of deferred payments
What does barter need
A double coincidence of wants
What are the 6 characteristics of money
Durable, divisible, convenient, consistent, limited, acceptable
What is M0 (narrow supply of money)
The amount of notes and coins in circulation in the country and the operational balances that the main bank keeps within the BofE
What is M4 (broad money supply)
includes M0 and money deposited in the bank accounts throughout the country
What is the reserve ratio
the ratio of loans given out and money kept in the bank. e.g. 2% ratio means in order for £100 to be given out there needs at lest £2 cash in the bank
What is liquidity
Ease with which assets can be converted into cash
What is the advantage of having liquid assets
helps cope with unexpected crisis. However, don’t have too much because there are low financial returns
Which kind of money is the most liquid
M0 because it is basically all liquid assets. M4 is less liquid because withdrawing money from savings in the account often has time barriers
What is the liquidity trap
monetary policy become ineffective due to very low interest rates combined with consumers who pfefer to save rather than invest in higher yielding bonds
