Economic Growth Part 2

Question 1

What are inflationary pressures?

Answer 1

Upward pressure on prices. Can lead to an increase in prices

Question 2

Describe a boom / peak

Answer 2

National income is high
Economy will be working at beyond full employment, there will be a positive output gap
Consumption and investment expenditure will be high
Tax revenues will be high
Wages will be rising and profits increasing
Imports will be increasing

Question 3

Describe a downturn

Answer 3

Output and national income fall. This leads to a fall in consumption and investment.
Tax revenues begin to fall and government expenditure on benefits begins to rise
Imports decline and inflationary pressures ease, prices in the economy start to decrease

Question 4

Describe a recession / depression

Answer 4

Economic activity is at a low
High unemployment exits
Consumption, investment and imports will be low

Question 5

Describe a recovery / expansion

Answer 5

National income and output start to increase again
Unemployment falls, more people have jobs
Consumption, investment and imports begin to rise

Question 6

What is a demand side shock

Answer 6

A shock that affects AD

Question 7

Give some examples of demand side shocks

Answer 7

• The central bank may sharply raise interest rates, to combat rising inflation.
• The government may sharply raise taxes or cut government spending (fiscal policies) to combat rising inflation or balance its budget.
• The world economy may go into recession, hitting UK exports sharply and so sending the UK into a recession too.
• There may be a sharp rise in the value of the pound, SPICED

Question 8

What are supply side shocks?

Answer 8

A shock which affects the AS

Question 9

Give some examples of supply side shocks

Answer 9

• A large rise in world commodity prices could both raise the price level in the UK and lead to a rise in import values. The rise in import costs will reduce aggregate supply leading to lower output.
• An outbreak of trade union militancy could see large wage increases which will raise the price level substantially and reduce aggregate supply.

Question 10

What can supply and demand side shocks cause?

Answer 10

Both can cause recessions and booms to occur, they are the causes of the trade cycle