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Macroeconomics > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

What is demand side

A

Relates to the impact of changes in aggregate demand on the economy

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2
Q

What is the supply side

A

Relates to changes in the potential output of the economy which is affected by the available factors of production eg changes in the size of the labour force

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3
Q

What is the trend growth rate

A

The rate at which output can grow on a sustained basis without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy

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4
Q

What is the economic cycle

A

Upswing and downswing in aggregate economic activity taking place over 4 to 12 years

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5
Q

What is actual output

A

Level of real output produced in the economy in a particular year actual output differs from the trend level of output when there are output gaps

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6
Q

What are output gaps

A

Show the level of actual real output in the economy either higher or lower than the trend output level

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7
Q

What is a positive output gap

A

The level of actual real output in the economy is greater than the trend output level

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8
Q

What is involuntary unemployment

A

Occurs when workers are willing to work at current market wage rates but there are no jobs available

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9
Q

What is voluntary unemployment

A

Occurs when workers choose to remain unemployed and refuse job offers at current market wage rates

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10
Q

What is frictional unemployment

A

Unemployment that is usually short term and occurs when a worker switches between jobs

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11
Q

What is structural unemployment

A

Long term unemployment occurring when some industries are declining even though other industries may be growing. Also occurs within a growing industry if automation reduces the demand for labour

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12
Q

What is cyclical unemployment

A

Unemployment cause by a lack of aggregate demand in the economy occurring when the economy goes in to a recession or depression

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13
Q

What is deindustrialisation

A

The decline of manufacturing industries

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14
Q

What is seasonal unemployment

A

Unemployment arising in different seasons of the year caused by factors such as the weather and the end of Christmas period

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15
Q

What are real wages

A

The purchasing power of the nominal wage

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16
Q

What is real wage unemployment.

A

Unemployment caused by real wages being stuck above the equilibrium market clearing real wage

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17
Q

What is equilibrium unemployment

A

Exists when the economy’s aggregate labour market is in equilibrium. It is the same as the natural level of unemployment

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18
Q

What is the natural rate of unemployment

A

The rate of unemployment when the aggregate labour mark is in equilibrium

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19
Q

What is demand pull inflation

A

A rising price level caused by an increase in aggregate demand shown by a shift of the AD curve to the right

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20
Q

What is cost push inflation

A

A rising price level caused by an increase in the costs of production show by a shift of the SRAS curve to the left

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21
Q

What are monetarist

A

Economists who argue that a prior increase in the money supply is the cause of inflation

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22
Q

What is monetarism

A

Narrow monetarism centres on increases in the money supply as the prime cause of inflation. Broader monetarism focuses on the virtues of free markets in resource allocation

23
Q

What is the quantity theory of money

A

The oldest theory of inflation which dates that inflation is caused by a persistent increase in the supply of money

24
Q

What is the Phillips curve

A

The apparent relationship between the rate of inflation and the rate of unemployment

25
Q

What is short run growth primarily caused by

A

Demand side changes in the economy

26
Q

What happens when the normal capacity level of output is reached

A

There is no longer any idle resources and the economy is producing on the LRAS curve

27
Q

What do supply side reforms relate to

A

The determinants of long run economic
Supply side reforms which increase labour productivity bringing about higher output per worker result from the investment decisions made by firms in pursuit of profit

28
Q

What are the costs of economic growth

A

Uses up finite resources such as oils and minerals that cannot be replaced
Leads to pollution and other forms on environmental degradation
Can destroy local cultures and communities and widen inequalities
Urbanisation which swallows up good agricultural land
Rapid growth of population
Countries suffering more growth can enter a vicious circle

29
Q

What are the benefits of economic growth

A

Increases standards of living and people’s welfare
May lead to more civilised communities who take action to improve the environment
More environmentally friendly technologies
Increased length of people’s lives and reduced disease
Produces a fiscal dividend- tax revenue
Can generate a virtuous circle

30
Q

What individuals can suffer from economic growth

A

Many of the poor can suffer from loss of jobs and Increased inequality increased automation brought about by faster economic growth may reduce overall demand for labour

31
Q

What are economic cycles

A

Can be between 4 and 12 years long are caused primarily by fluctuations in aggregate demand. Supply side factors such as shocks have also been recognised as causes of economic cycles

32
Q

Principal explanations of the economic cycle are

A

Fluctuations in AD

Supply side factors

33
Q

Other factors that may contribute to cyclical changes include

A 
Role of speculative bubbles 
Political business cycle theory 
Outside shocks 
Changes in inventories 
Marxist explanation-  
Multiplier accelerator interaction 
Climatic cycles- sunspots affecting harvests
34
Q

What is the Marxist explanation for economic cycles

A

Recessions create conditions in which stronger firms either take over weaker competitors or buy at rock bottom prices the assets of rivals that have been forced out of business

Economic cycles are deemed necessary for the regeneration and survival of capitalism

35
Q

Why is there geographical immobility of labour

A

Caused by factors such as family ties and local friendships discouraging people from moving
Cost of moving and difficulty of obtaining housing

36
Q

Why is there occupation immobility of labour

A

Difficulties in training for jobs that require different skills
Effects of restrictive practices
New workers must possess unnecessary qualifications
Race gender age discrimination

37
Q

Example of someone who may be fractionally unemployed

A

Young workers such as university graduates joining the labour market for the first time

38
Q

What did Keynes believe about cyclical unemployment

A

That it is involuntary not caused by the workers themselves as a result unemployed should not be blamed for their idleness

39
Q

What policies should be used to reduced frictional and structural unemployment

A

Supply side policies

40
Q

What policies should be used to reduce cyclical unemployment

A

Using fiscal and monetary policy to stimulate aggregate demand

41
Q

What do free market economists argue about real wage unemployment

A

As long as labour markets remain competitive unemployment should be temporary 
Real wage unemployment is voluntary on the grounds that workers and their trade unions should be prepared to accept wage cuts

42
Q

What are the consequences of unemployment for the economy

A

Waste of human capital
Economy produces insides its PPF
Reduces an economy’s international competitiveness
Can reduce incentives for firms to invest in new state of the art technologies that generally lead to increased export competitiveness
Reduced need to invest in capital intensive technologies
Higher underinvestment caused by higher business taxes to pay for welfare benefits
Workers become effectively unemployable longer the period
When inactive workers are seen as unemployable economy begins to act as if it is on its PPF even though there are plenty unemployed

43
Q

Consequence of unemployment for the individual

A

Lead to low standards of living

Unemployed become marginalised from normal economic and human activity and their self esteem is reduced

44
Q

Main ways to reduce unemployment

A

Identifying correct underlying cause of unemployment

In the long run the only way to reduce is to achieve successful economic growth

45
Q

How to reduce frictional and structural unemployment

A

Improving geographical immobility of labour - subsidising removal costs
Improving occupational mobility of labour- providing retraining schemes and introducing laws to ban professional and trade Union restrictive practices
Reducing employment search period - intro of JSA
Supply side policies

46
Q

Why is it important to diagnose correctly the causes of inflation ?

A

Must determine whether inflation is caused by excess demand or by cost push factors when deciding on the appropriate policies to reduce or control inflation
If inflatio caused by excess demand - can raise or lower interest rates

47
Q

What is the equation of exchange

A

Money supply x the velocity of circulation of money = price level x quantity of output

48
Q

Example of inflation psychology

A

Home owners with large mortgages and the government have a vested interest in allowing inflation to continue in order to reduce the real value of their accumulated debt

49
Q

What are some disadvantages of inflation

A

Distortion of normal economic behaviour
Breakdown in the function ms of money
Reduced international competitiveness
Shoe leather and menu costs

50
Q

What is one consequence of deflation

A

When people believe prices are going to fall they postpone big ticket consumption decisions
May erode business confidence and trigger recession or deepen and lengthen an already existing recession

51
Q

How do changes in other countries affect UK inflation

A

USA is important for UK as a source of export demand, inward investment and business and consumer confidence than an American downturn can exert downward pressure on the UK inflation rate
Sudden rise in oil prices in the Middle East will increase UK inflation

52
Q

What does a downward sloping Phillips curve indicate

A

Governments can successfully trade off between the policy objectives of reducing unemployment and achieving stable prices

53
Q

What is the difference with a LRAS curve Phillips curves

A

Trade offs are not possible if the gov expands aggregate demand in an attempt to reduce unemployment below its natural level it will trigger an accelerating rate of inflation which will eventually destroy the policy
Free market economists correct way to reduce unemployment is to use supply side policies

Macroeconomics (7 decks)

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