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Macroeconomics flashcards > Economic growth > Flashcards

Economic growth Flashcards

1
Q

Explain the long run underlying trend rate of growth

A

The annual average growth of full capacity caused by a shift outwards in LRAS (2.5%)

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2
Q

What has been the rate of growth in the UK in recent years

A

Slower economic growth in the last decade (1.9%) since the 2008/9 financial crisis

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3
Q

What is the key to long run economic growth

A

Successful supply side policies

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4
Q

Do shifts in AD cause economic growth

A
  • Just shifting AD does not cause long run economic growth
  • However, stable growth in AD promotes capital investment which causes LRAS to shift out
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5
Q

What happens if LRAS shifts out but AD stays the same

A

Potential growth increases but actual growth stays the same (growing negative output gap)
Standard of living stays the same

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6
Q

What are the 4 ways of improving the economy from a supply-side point of view

A

1) Increase the size of the working population
2) Increasing the labour activity rate
3) Increasing the hours worked per employee per week
4) Increase the output per employee per hour (labour productivity)

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7
Q

Which of the 4 ways of improving the economy from a supply-point of view is the most important

A
  • Increasing labour productivity
    This is because the others have limitations and could be controversial
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8
Q

What are the 3 ways that the government can increase the size of the working population

A
  • Increase the retirement age i.e pension age
  • Encourage net immigration (especially those of working age)
  • Increase birth rate
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9
Q

Explain the dependency ratio

A
  • Ratio of working age population to dependents
  • Important to increase real GDP per capita
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10
Q

How has the post WW2 baby boom impacted the dependency ratio

A

Increased the dependency ratio when the children joined the work force but having reverse effects recently because many have now retired

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11
Q

What is the main limitation of increasing the activity rate as a means of improving the economy

A

The UK has one of the highest activity rates in the developed world, so there is limited scope for it to increase further

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12
Q

What is the limitation of increasing number of hours worked per employee

A

limit of increasing hours worked so unsustainable and unethical

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13
Q

What is the benefit of increasing productivity above other supply-side policies

A

There is no limit to productivity

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14
Q

How do more competitive (easier to enter) markets improve productivity

A

Firms have to be more productive and innovative to survive, raising overall efficiency

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15
Q

How does increasing fixed capital investment increase productivity

A

Increases both the quantity and quality of capital equipment

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16
Q

How does education and training improve productivity

A

Improves skill level of the population so workers can carry out complex tasks more efficiently

17
Q

Explain why there is pessimism about long term growth

A
  • worsening dependency ratio
  • Big decrease in productivity since 2008 financial crisis
18
Q

Why has productivity and long run growth significantly decreased since 2008/9 financial crisis

A

Banks are more cautious about lending and businesses are more cautious about investing

19
Q

What is the government objective regarding short term economic growth

A

Keep the growth rate stable without significant positive and negative output gaps

20
Q

What was the NICE decade

A
  • Early 90s till 2008
  • Non-inflationary continuous expansion
  • Expanded for 63 consecutive quarters
21
Q

What was the financial crisis

A
  • 2008/2009
  • 5 consecutive quarters of negative growth
22
Q

What are the characteristics of an economic boom

A
  • Rate of growth is well above trend rate
  • no demand deficient unemployment
  • increasing demand pull inflation
  • Increasing imports as incomes rise
23
Q

What are the characteristics of a downturn

A
  • Rate of growth is falling slightly below trend rate
  • Rise in demand-deficient employment
  • Disinflation ( even potentially deflation)
  • Imports reduced as incomes fall
24
Q

What are the characteristics of a recession

A
  • Rate of growth is negative for 2 consecutive quarters
  • Sharp rise in demand deficient unemployment
  • Imports reduced as incomes fall
25
Q

What are the characteristics of a recovery/upturn

A
  • Rate of growth moves back towards the trend rate
  • Demand deficient unemployment falls
  • Deflationary pressures recede
  • Imports grow as incomes rise
26
Q

What are evaluation points for economic growth

A
  • How intense and long lasting was the boom/recession
  • What is happening in other economies with which we trade
  • What is the response of the government and Bank of England
27
Q

What causes short term fluctuations in the trade cycle

A

Internal and External shocks causing shifts in AD and SRAS

28
Q

What is an example of a negative external supply side shock

A

Crude oil prices went up in the 70s, shifting SRAS inwards

29
Q

What is an example of a positive external supply side shock

A

Globalisation allowing cheaper imports, shifting SRAS out

30
Q

What is an example of an external demand side shock

A

Recession in another country decreases demand for UK exports, shifting AD inwards

31
Q

What are 2 examples of internal supply side shocks

A
  • Excessively low interest rates causing excessive risk taking from Banks, causing them to incur losses, reducing lending, shift inwards SRAS
  • Natural disasters, reducing stock, shifting SRAS inwards
32
Q

What is an example of internal demand side shocks

A
  • Government policy errors e.g. cut tax and let AD rise too quickly causing high inflation causing recession
33
Q

What is a bubble

A
  • In a boom, consumers take on lots of debt because their confidence is high
  • Goods are massively over-valued
  • Eventually consumers stop investing because their debt is too high
  • High debt and overvalued goods causes far less consumption - recession
34
Q

What prevents recovery from a recession

A
  • Credit crunch
  • Household debt from pre-crisis
  • Depressed export markets

Macroeconomics flashcards (9 decks)

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