Chapter 11 Flashcards
Equilibrium =
When in an economy injections equal its withdrawals.
The Accelerator =
- Injections lead to increased demand.
- This leads to increased supply, or if supply is not available increased prices.
- increased demand and supply, leads to new investments, which are further injections, which leads to an increase in national income.
So growth stimulates more growth. Growth usually accelerates.
The multiplier effect =
New injections spent into the economy get re-spent by those who get paid and re-spent again. So £20m investment by the government can lead to £50m being spent into the economy.
Calculate the multiplier K:
K = 1 / 1 - MPC
Marginal propensity to consume = change in consumption / change in income
Why do we want to know the multiplier:
- decide on the correct level of stimulus
- it can help to control high inflation
Trade Cycle:
- there is a downturn nearly every decade.
- Boom, Recession, Depression, Recovery
Boom =
- low unemployment
- labour and capacity become fully utilised
- leads sometimes to a government budget surplus
- high expectations
- inflation
- imports may rise - money starts to leave the flow
- bottlenecks and shortages may occur
Government policy:
- there is a growing aggregate demand
- raising taxation
- reduce public spending and injections
Recession:
- demand starts to level off because of rising prices
- decrease in investments and expenditures
- decrease in revenues and profitability
- unemployment may rise
- inflation falls
- confidence falls
Government policy:
- lower taxation
- lower interest rates
- increasing public expenditure
- supply-side policy - can take long to take effect.
If the above does not increase demand, this leads to depression
Depression
- high unemployment
- low inflation
- low confidence
- very low demand
- low profits and low revenue
Government policy:
- lowering taxation
- lowering interest rates
- increase public expenditure
- supply-side policy
Recovery:
- confidence grows
- output and employment increase
- demand stabilises or grows
- unemployment falls
- rise in investment
Government policy:
- fiscal policy
- monetary policy
- supply-side policy
Full employment =
Everyone who wants to be in work is in work
How to measure unemployment:
Number unemployed / total workforce x 100%
Why is unemployment a problem:
- potentially increased crime
- long term loss of labour and skills
- output of the economy is below full capacity
- a possible negative effect on national income; wages fall, because of the excessive supply of workforce available
- increased welfare costs
- fall in tax revenue
7 types of unemployment
- Cyclical; during recession or depression people get made redundant
- Structural; closing of the coal mines
- frictional; people who are in between jobs and looking for something else
- seasonal; tourism, farming
- voluntary; as a choice
- classical or real wage: when businesses don’t employ, because wages are too high
- technological: workers displaced because of new technology
Inflation =
The general rising of prices over time.
It’s also a decline in the purchasing power of money.
