CH12: Economic Growth, Unemployment, & Inflation

Question 1

What are the three macroeconomic challenges?

Answer 1

The three macroeconomic challenges are economic growth, unemployment, and inflation.

Question 2

What is the importance of economic growth?

Answer 2

Economic growth is crucial as it contributes to improved living standards and increased employment opportunities.

Question 3

How is economic growth measured?

Answer 3

Economic growth is measured using indicators such as GDP, which reflects the total value of goods and services produced.

Question 4

What is the business cycle?

Answer 4

The business cycle refers to the fluctuations in economic activity characterized by periods of expansion and contraction.

Question 5

What is the relationship between inflation and unemployment?

Answer 5

The relationship between inflation and unemployment can be illustrated using the Phillips curve.

Question 6

What are the various types of unemployment?

Answer 6

The various types of unemployment include frictional, structural, cyclical, and seasonal unemployment.

Question 7

What is inflation?

Answer 7

Inflation is the continuous rise in prices in general, characterized by a significant annual increase in the price level of most goods and services.

Question 8

What is the Consumer Price Index (CPI)?

Answer 8

The CPI is the most commonly used indicator of the general price level, representing the cost of a representative basket of goods and services.

Question 9

How is the inflation rate calculated using CPI?

Answer 9

The inflation rate is calculated by determining the percentage change in CPI from one year to another.

Question 10

What is the Producer Price Index (PPI)?

Answer 10

The PPI measures the prices at the level of the first significant commercial transaction, excluding services.

Question 11

What is the Implicit GDP Deflator?

Answer 11

The Implicit GDP deflator is an index that measures inflation as a side-effect of calculating economic growth.

Question 12

What are the distribution effects of inflation?

Answer 12

Inflation redistributes income and wealth, benefiting debtors at the expense of creditors.

Question 13

What are the economic effects of inflation?

Answer 13

Inflation can lead to lower economic growth and higher unemployment, as decision-makers focus on anticipating inflation rather than pursuing new opportunities.

Question 14

What are the social and political effects of inflation?

Answer 14

Inflation can lead to social unrest and conflict as people blame each other for rising costs of living.

Question 15

What is expected inflation?

Answer 15

Expected inflation occurs when people anticipate higher inflation rates and adjust their behavior accordingly, potentially raising actual inflation.

Question 16

What causes demand-pull inflation?

Answer 16

Demand-pull inflation occurs when aggregate demand increases while aggregate supply remains unchanged, often due to increased consumption, investment, government spending, or export earnings.

Question 17

What is demand-pull inflation?

Answer 17

Demand-pull inflation occurs when aggregate demand increases, leading to higher prices.

Illustrated by a rightward shift of the AD curve.

Question 18

What factors can lead to increased consumer credit?

Answer 18

Lower interest rates can lead to the availability of consumer credit or cheaper credit.

Question 19

How does investment spending (I) relate to demand-pull inflation?

Answer 19

Increased investment spending can occur due to lower interest rates.

Question 20

What role does government spending (G) play in demand-pull inflation?

Answer 20

Increased government spending can combat unemployment or improve services.

Question 21

How can export earnings (X) contribute to demand-pull inflation?

Answer 21

Increased export earnings can result from improved economic conditions globally.

Question 22

What is the relationship between money stock and aggregate demand?

Answer 22

Increases in the money stock are usually related to increases in components of aggregate demand.

Question 23

What happens to income (Y) during demand-pull inflation?

Answer 23

There is an increase in income (Y) alongside an increase in aggregate demand (AD).

Question 24

What happens to prices (P) during demand-pull inflation?

Answer 24

There is an increase in prices (P) as a result of increased aggregate demand.

Question 25

What happens to production during demand-pull inflation?

Answer 25

Production increases as aggregate demand rises.

Question 26

What causes demand-pull inflation?

Answer 26

An increase in aggregate demand exceeding production capacity.

Question 27

How can demand-pull inflation be controlled?

Answer 27

Restrictive monetary (higher interest rates) and fiscal policies (less spending, higher taxes).

Question 28

What is the downside of using restrictive policies?

Answer 28

Reduced production, income, and employment.

Question 29

What causes cost-push inflation?

Answer 29

Increases in production costs.

Question 30

What are 5 sources of cost-push inflation?

Answer 30

Wage hikes, import cost increases, higher profit margins, lower productivity, natural disasters.

Question 31

What is stagflation?

Answer 31

Inflation combined with stagnation (low output and high unemployment).

Question 32

How can cost-push inflation be prevented?

Answer 32

Control wages/profit increases and improve productivity.

Question 33

What is the strict definition of unemployment?

Answer 33

People 15+ who are jobless, available to work, and actively job hunting.

Question 34

What is the expanded definition of unemployment?

Answer 34

People who are jobless and available but not actively seeking work.

Question 35

What is frictional unemployment?

Answer 35

Temporary unemployment during job transitions.

Question 36

What is seasonal unemployment?

Answer 36

Joblessness due to seasonal work cycles.

Question 37

What is structural unemployment?

Answer 37

Mismatch between workers’ skills and job requirements.

Question 38

What is cyclical unemployment?

Answer 38

Caused by economic downturns or low demand.

Question 39

What does the Phillips Curve show?

Answer 39

An inverse relationship between inflation and unemployment.

Question 40

What happens to the Phillips Curve during stagflation?

Answer 40

It shifts to the right.

Question 41

What is an incomes policy?

Answer 41

Government intervention to control wage and price increases.

Question 42

What are the requirements for a successful incomes policy?

Answer 42

Tripartite agreement (gov, employers, unions) and perceived fairness.

Question 43

How is economic growth defined?

Answer 43

Annual increase in real GDP per capita.

Question 44

What does 'real GDP' mean?

Answer 44

GDP adjusted for inflation (constant prices).

Question 45

Why must GDP be adjusted per capita?

Answer 45

To account for population growth.

Question 46

List three problems with using GDP as a welfare measure.

Answer 46

Ignores non-market activity, unrecorded economy, and welfare impact.

Question 47

What are the four stages of the business cycle?

Answer 47

Trough, expansion (boom), peak, contraction (recession).

Question 48

What do points A to C represent in a business cycle graph?

Answer 48

One complete business cycle.

Question 49

What are leading indicators in business cycles?

Answer 49

Variables that change before overall economic activity, e.g., car sales, new company registrations, exports.

Question 50

What are the two main categories of economic growth factors?

Answer 50

Supply factors and demand factors.

Question 51

What do supply factors do?

Answer 51

Increase the economy’s production capacity (potential output).

Question 52

What are examples of supply factors?

Answer 52

Natural resources, labour, capital, entrepreneurship.

Question 53

Why are natural resources considered both an opportunity and a limitation?

Answer 53

They can be exploited for growth, but are non-renewable and may become too expensive to extract.

Question 54

What affects the size and quality of a labour force?

Answer 54

Population structure, education, health, and net migration.

Question 55

What are the effects of HIV/AIDS on South Africa’s labour force?

Answer 55

Absenteeism, skill loss, illness, and reduced productivity.

Question 56

What is capital widening?

Answer 56

Capital increases in line with labour; capital per worker stays constant.

Question 57

What is capital deepening?

Answer 57

Capital per worker increases; productivity improves.

Question 58

What role does entrepreneurship play in economic growth?

Answer 58

Entrepreneurs combine resources, drive innovation, and identify opportunities.

Question 59

What makes up domestic demand?

Answer 59

Consumption (C), investment (I), and government spending (G).

Question 60

Why must increases in demand be matched with supply increases?

Answer 60

To avoid inflation and balance of payments issues.

Question 61

How do exports contribute to economic growth?

Answer 61

They raise output and relieve balance of payments constraints.

Question 62

What is import substitution?

Answer 62

Replacing imported goods with domestically produced ones.

Question 63

How did import substitution impact South Africa?

Answer 63

Helped grow the manufacturing sector by replacing imported consumer goods.