Chapter 11 Flashcards
Draw short and long run economic growth
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Define demand side
Impact of changes in aggregate demand on the economy
Draw short run economic growth portrayed by rightward shifts of AD
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Define supply side
Changes in potential output of the economy
Example of supply side
Change in decreasing wages, resulting in more supply
Define trend growth rate
Long run growth rate, output can grow on a sustained basis without putting upward or downward pressure on inflation(annual average percentage)
Define economic cycle
Upswing and downswing in aggregate economic activity
What causes short run economic growth
Increase in AD (demand side)
What causes long run economic growth
Supply side of , increase in factors of production
Costs of economic growth
- Uses up finite resources
- Leads to pollution
- Destroy cultures and communities
- Urbanisation
- Rapid growth in pop leads to more mouths to feed
Benefits of economic growth
- increases standards of living
- Increase people’s life expectancy/
- virtuous cycle (business confidence such as)
Does economic growth increase international competitiveness
Yes
Draw an economic cycle
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What is actual output
Round the trend like which is the real level of output produced by an economy
Cause of changes in phases of economic cycle
-Fluctuations of AD (Demand side factors)
-Supply side factors
-Outside shocks
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Two main ways of changes in economic activity
- seasonal (by seasons)
- cyclical (years)
What else apart from GDP can be used to measure phases of the economic cycle
-employment
Define positive and negative output gap
Positive output gap- level of actual real output greater than trend
Negative output gap- level of actual real output lower than trend
Show peak and trough
Draw the negative and positive output gaps on an AD AS diagram
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Difference voluntary and involuntary unemployment
Voluntary -by choice
Involuntary- Not by choice
Types of unemployment and define
Frictional- between jobs
Cyclical- demand deficient
Structural- Such as robots
Seasonal- due to seasons changing
Define deindustrialisation
Decline of manufacturing industries
What was Keynesian unemployment
Cyclical unemployment lack of demand due to under full employment equilibrium due to ineffective AD
What is real wage unemployment
Unemployment caused by real wages being stuck above equilibrium market clearing real wage.
Too much demand too little supply due to high wage
Why might wage be unable to go down
Due to trade ujions
What is the natural rate of unemployment
When aggregate labour market is in equilibrium.
Frictional and structural make this up. natural rate
Draw natural level of unemployment
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Consequences of unemployment
- Reduces international competitiveness
- Higher taxation
- Black economy
Gov policies to reduce unemployment
- Improve ability to job search
- Job seekers allowance
- Supply side policies
Explain demand pull inflation
Rising price level caused by increase in AD
Draw demand pull inflation
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Explain cost push inflation
Rising price level caused by increase in the cost of production
Draw cost push production
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Why must governments be able to correctly diagnose cause or causes of unemployment
To reduce it
What do monetarists believe in regard to inflation
Inflation is caused by an increase of money supply
What is the quantity theory of money
Oldest inflation theory that inflation is caused by increase of money
What happens if people expect inflation to increase
They spend more now, actually causing this inflation to occur
What happens if people expect inflation to fall
They spend less so this does occur
Disadvantages of inflation
- Distortion of economic behaviour
- Extreme cases there is a breakdown in the functions of money
- Reduced competitiveness internationally
Two types of deflation and draw
Benign- improvements in economies supply side
Malignant- Collapse in AD
What happens to inflation and unemployment when there is a
positive output gap
negative output gap
Positive- increase and fall
Negative- Decrease and rise
What is the short run philips curve and draw it
Relationship between rate of inflation and unemployment
What is the LR philips curve and explain it
It is at the natural rate of unemployment ,impossible to reduce it below this level, without causing hyperinflation
What is the correct way of reducing unemployment below its natural rate
Any supply side policies
