Economic Performance Flashcards
What happens if there is a negative output gap
interest rates rise
what is most likely to reduce negative output gap
rise in exchange rate
what happens when you increase interest rates when exchange rate are rising
increases level of unemployment
what will lead to the bank of England lowering interest rates?
- negative output gap
- rising exchange rate
- inflation below target
short run economic growth
- comes from increased use of previously unemployed resources
- result in an increase in overall output
determinants of short run growth
- increase in AD
2. Increase in SRAS
long run economic growth
- comes from an increase in LRAS
- growth based on increasing the potential output level of the economy
determinants of long run economic growth
- improvements in quantity or quality of FoP
1) increasing labour force
2) improvements in labour productivity
3) capital investment
4) new technology
Benefits of economic growth
- higher living standards
- easier to find jobs
- increased tax revenue
- greater international status for the government
costs of economic growth
- increased inflation if short run growth rise too quicklu
- depletion of natural resources
- increased negative externalities
boom
period of above average short run economic growth
- low unemployment
- inflation rising
- current account deficit
downturn
period where short run economic growth falls from above average to below average
- unemployment stops falling
- inflation stops rising
- current account moves towards surplus
recession
two successive quarters of a year where short run economic growth is negative
- unemployment rises
- inflation falls
- current account moves into surplus
recovery
short run economic growth starts to increase after a recession
- inflation remains low
- unemployment stops rising
Negative output gap
- actual growth below trend growth
- cyclical unemployment likely to increase
- Econ growth below productive capacity
What is negative output gap caused by
low AD
how to reduce negative output gap
increase AD
Positive output gap
- actual growth above trend growth
- leads to inflation
- to keep output high, costs rise inflationary pressures
How to reduce positive output gap?
reduce AD
cyclical unemployment
caused by insufficient AD
- if spending on output is low, workers producing that output won’t be required
Frictional unemployment
caused by movements into and out of the job market ie occurs when people are between jobs
how to reduce frictional unemployment
improvements in helping people find out what job vacancies are available
structural unemployment
caused by mismatched between the labour supply available and the labour demand for differently skilled labour
- also caused by advancements in technology
voluntary unemployment
where people are unwilling to accept a job at the going wage rate despite there being jobs available (frictional)
involuntary unemployment
where people are unable to find unemployment at current market wage rate (cyclical)
real wage unemployment
occurs when the real wage is above the market equilibrium wage rate in the labour market
deflation
a fall in the average level of price over time
disinflation
where the rate of inflation falls but is still positive
Demand pull inflation
- caused by excessively high levels of AD
- high levels of spending gives signals to firms increase output
- higher spending = firms increase prices due to high costs for producing more output
- when economy operating LRAS,m increase in AD leads to inflation
how to reduce demand pull inflation
decrease AD
Cost push inflation
- caused by a rise in costs of production
- higher prices and falling output
consequences of inflation
- uncompetitive exports
- search costs
- uncertainty
- policy response
search costs
individual spend more time researching goods (comparing prices)
uncertainty
businesses cautious in production or expansion
policy response
gov implement deflationary policies (eg higher interest rates)
consequences of deflation
- delays in consumption (people wait until goods are cheaper
- rising real value of debt (falls in prices, falls in income
