Chapter 11

Question 1

What is demand side

Answer 1

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

Question 2

What is the supply side

Answer 2

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

Question 3

What is the trend growth rate

Answer 3

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

Question 4

What is the economic cycle

Answer 4

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

Question 5

What is actual output

Answer 5

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

Question 6

What are output gaps

Answer 6

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

Question 7

What is a positive output gap

Answer 7

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

Question 8

What is involuntary unemployment

Answer 8

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

Question 9

What is voluntary unemployment

Answer 9

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

Question 10

What is frictional unemployment

Answer 10

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

Question 11

What is structural unemployment

Answer 11

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

Question 12

What is cyclical unemployment

Answer 12

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

Question 13

What is deindustrialisation

Answer 13

The decline of manufacturing industries

Question 14

What is seasonal unemployment

Answer 14

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

Question 15

What are real wages

Answer 15

The purchasing power of the nominal wage

Question 16

What is real wage unemployment.

Answer 16

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

Question 17

What is equilibrium unemployment

Answer 17

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

Question 18

What is the natural rate of unemployment

Answer 18

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

Question 19

What is demand pull inflation

Answer 19

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

Question 20

What is cost push inflation

Answer 20

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

Question 21

What are monetarist

Answer 21

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

Question 22

What is monetarism

Answer 22

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

Question 23

What is the quantity theory of money

Answer 23

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

Question 24

What is the Phillips curve

Answer 24

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

Question 25

What is short run growth primarily caused by

Answer 25

Demand side changes in the economy

Question 26

What happens when the normal capacity level of output is reached

Answer 26

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

Question 27

What do supply side reforms relate to

Answer 27

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

Question 28

What are the costs of economic growth

Answer 28

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

Question 29

What are the benefits of economic growth

Answer 29

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

Question 30

What individuals can suffer from economic growth

Answer 30

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

Question 31

What are economic cycles

Answer 31

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

Question 32

Principal explanations of the economic cycle are

Answer 32

Fluctuations in AD | Supply side factors

Question 33

Other factors that may contribute to cyclical changes include

Answer 33

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

Question 34

What is the Marxist explanation for economic cycles

Answer 34

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

Question 35

Why is there geographical immobility of labour

Answer 35

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

Question 36

Why is there occupation immobility of labour

Answer 36

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

Question 37

Example of someone who may be fractionally unemployed

Answer 37

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

Question 38

What did Keynes believe about cyclical unemployment

Answer 38

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

Question 39

What policies should be used to reduced frictional and structural unemployment

Answer 39

Supply side policies

Question 40

What policies should be used to reduce cyclical unemployment

Answer 40

Using fiscal and monetary policy to stimulate aggregate demand

Question 41

What do free market economists argue about real wage unemployment

Answer 41

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

Question 42

What are the consequences of unemployment for the economy

Answer 42

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

Question 43

Consequence of unemployment for the individual

Answer 43

Lead to low standards of living | Unemployed become marginalised from normal economic and human activity and their self esteem is reduced

Question 44

Main ways to reduce unemployment

Answer 44

Identifying correct underlying cause of unemployment | In the long run the only way to reduce is to achieve successful economic growth

Question 45

How to reduce frictional and structural unemployment

Answer 45

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

Question 46

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

Answer 46

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

Question 47

What is the equation of exchange

Answer 47

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

Question 48

Example of inflation psychology

Answer 48

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

Question 49

What are some disadvantages of inflation

Answer 49

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

Question 50

What is one consequence of deflation

Answer 50

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

Question 51

How do changes in other countries affect UK inflation

Answer 51

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

Question 52

What does a downward sloping Phillips curve indicate

Answer 52

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

Question 53

What is the difference with a LRAS curve Phillips curves

Answer 53

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