Chapter 11 - Economic performance Flashcards

Question

Natural rate of unemployment

Answer 1

The rate of unemployment when the labour market is in equilibrium and comprises frictional + structural unemployment.

Answer 2

when people choose to remain unemployed rather than take jobs available.

Answer 3

where structural unemployment affect a whole region e.g. South Yorkshire or South Wales after closure of mines.

Answer 4

special case of structural employment arising from labour saving technology occurs when developments in technology and working practices cause some workers to lose their jobs.

Answer 5

when people do not have productive full-time employment, but are not counted in the official unemployment statistic

Answer 6

Fall in demand for goods and services Fall in demand for businesses further down the supply chain negative multiplier effects

Answer 7

Bigger pool of surplus labour is available Less pressure to pay higher wages Less risk of industrial / strike action

Answer 8

Increased spending on unemployment benefits Fall in revenue from income tax Fall in profits – reduction in revenue from corporation tax May lead to rise in government borrowing (i.e. a budget deficit)

Answer 9

``` Lost output (real GDP) from people being out of work long-term unemployed may leave the labour force permanently – fall in potential GDP Increase in the inequality ```

Answer 10

``` Cyclical Frictional Seasonal Structural Real-Wage ```

Answer 11

Lower interest rates (a monetary policy stimulus) A lower exchange rate (helps exporters) Lower direct taxes (fiscal stimulus to spending power) Government spending on major capital projects (e.g. improving the transport infrastructure) Employment subsidies Incentives to encourage flows of foreign investment in the UK

Answer 12

Increased spending on education & training including an emphasis on “lifetime-learning”) Improved flows of information on job vacancies Changes to tax and benefits to improve incentives Measures designed to make the labour market more flexible

Answer 13

Incomes flowing into households will grow | Falling unemployment adds to demand and creates a positive multiplier effect on incomes, demand and output.

Answer 14

When incomes and spending are growing, there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen

Answer 15

With more people in work paying income tax, national insurance and value added tax, the government can expect a large rise in tax revenues and a reduction in social security benefits

Answer 16

Falling unemployment can also create a rise in inflationary pressure However this is not really a risk when the economy is coming out of recession, since aggregate supply is likely to be highly elastic because of a high level of spare capacity

Answer 17

Inflation is a sustained increase in the general price level, leading to a fall in the purchasing power of money.

Answer 18

Deflation occurs when the rate of inflation becomes negative i.e. the general price level is falling and the purchasing power of money is increasing.

Answer 19

Is a rapid rise in prices - the value of money becomes worthless and people lose all confidence in money both as a store of value and also as a medium of exchange.

Answer 20

slow growth and rising unemployment

Answer 21

measured by the annual percentage change in the level of consumer prices. Main measures are CPI and RPI

Answer 22

The British Government has set an inflation target of 2% - as measured by the CPI

Answer 23

when AD and output is growing at an unsustainable rate leading to increased pressure on scarce resource

Answer 24

- A monetary stimulus to the economy. Eg a fall in interest rates resulting in too much demand. - A fiscal stimulus e.g. a reduction in direct or indirect taxation or higher government spending leads to higher AD. - Depreciation of the exchange rate (This increases the price of imports and reduces the price of UK exports) - Faster economic growth in other countries – providing a boost to UK exports.

Answer 25

occurs when firms respond to rising costs, by increasing prices to protect their profit margins.

Answer 26

An increase in component costs. Rising labour costs - caused by wage increases. Higher indirect taxes imposed by government. A fall in the exchange rate

Answer 27

slow down the growth of AD or | boost the rate of growth of AS.

Answer 28

This involves raising interest rates to reduce consumer and investment spending (so lowering AD). Remember interest rates are set by MPC

Answer 29

To lower AD the government may reduce its own spending on public goods/services or welfare payments. Or it can choose to raise direct (not indirect) taxes, leading to a reduction in real disposable income.

Answer 30

Monetary policy Fiscal policy Supply-side policy Reducing expectations

Answer 31

include those that seek to increase productivity, competition and innovation – all of which should lead to lower prices

Answer 32

The government has succeeded in recent years in convincing businesses that inflation will remain low. This increases business confidence and dissuaded Unions from making excessive pay claims.

Answer 33

- Will initially affect those in the financial markets - These people will buy more financial assets - The increase in the demand for bonds will raise the price of bonds and lower the rate of interest - A fall in the interest rate generates an increase in investment

Answer 34

Stable, Low Inflation Steady & Sustainable Economic Growth Low Unemployment / High Employment Rising Living Standards

Answer 35

Inflation and unemployment have a stable and inverse relationship

Answer 36

when actual output is more than full-capacity output.

Answer 37

when actual output is less than what an economy could produce at full capacity