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economic performance Flashcards

1
Q

define inflation

A

acpntinuing rise in the average price level

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2
Q

what happened to inflation in the financial crisis 2008

A

average price level fell

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3
Q

two basic causes of inflation

A

excess aggregate demand
general rise in the costs of production

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4
Q

define demand pull inflation

A

a rising price level caused by an increase in agreggate demand

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5
Q

how is demand inflation shown on a diagram

A

shift of AD curve to the right

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6
Q

why does the price level have to rise (demand-pull)

A

to encourage firms to produce beyond point on sras curve to meet excess demand

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7
Q

where is the equillibirum at after AD curve shifts

A

on LRAS as capacity has increased

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8
Q

what happens as a result ofn AD shifting to the right

A

reflation of real output and employment and inflation of the price level

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9
Q

define cost push inflation

A

a rising price level caused by an increase in the costs of production

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10
Q

how is cost push inflation shown on a diagram

A

a shift of the SRAS curve to the left on an AD/AS diagram

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11
Q

exmaples of rising productin costs

A

real wage-cost inflation
rising price of energy/commodities

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12
Q

what causes real wage cost inflstion

A

the growth of monopoly power in labour markets
trade unions in keynsian era collective bargaining increasing wages

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13
Q

what happens as SRAS shifts to the left

A

rise in price level and fall in national output as firms willing to produce less

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14
Q

global cause of import cost inflation

A

rise in world commodity price inflation

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15
Q

what happens when world economy is strong or in recesion to uk inflation

A

strong - imports inflation from other booming economies rising prices
recession- uk inflation is reduced

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16
Q

what would a fall in pounds exchange rate cause

A

imported cost push inflation
significant after 2008

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17
Q

quantity theory of money

A

old theory that inflation is caused by a persistent increase in the money supply

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18
Q

disadvantages of inflation

A

distributional effects
distortion of normal economic behaviour
international uncompetitiveness

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19
Q

distribution effects

A

weaker social groups in society will be worse effected

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20
Q

distortion of normal economic behaviour

A

diverting funds out of investment to unproductive hoarding and speculation

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21
Q

international uncompetitiveness

A

exports increase in price when inflation in uk is higher than competitor countries
lower growth and unemployment are likely result if there is a fixed exchange rate

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22
Q

three causes of deflation

A

fall in AD
negative multiplier effects
credit crunch

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23
Q

current account deficit

A

when currency outflows in the current account exceed inglows

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24
Q

current account surplus

A

when currency inflows exceed outflows

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25
balance of trade in goods
the part of the current account measuring payments for exports and imports
26
net investment income
diiference between inward and outward flows of investment income
27
example of foreign direct investment
BP investing in the construction of an oil refinery in the US gold coast region
28
short run growth
One factor is fixed e.g capital
29
Long run growth
Both labour and capital are variable, economy is not at full capacity
30
Trend growth rate
That rate at which output can grow, on a sustained basis, without putting pressure on inflatiom
31
Shifts of AD
Changes in C+I+G=(X-M)
32
Shifts of AS
Investment Technical progress Increase in size of labour force
33
Growth rate increase in 2002
2.5% to 2.75%
34
UK growth rate in 2014
3%
35
Phases in the economic cycle
Recovery Boom Peak Recession Trough
36
What is a trough also known as
Depression
37
Causes of change in the phases of the economi
Fluctuations in AD Supply side factors Political business cycle theory Role of speculative bubbles Outside economic shovks
38
Role of speculative bubbles
Rapid economic growth = rapid rise and speculative bubbles in asset prices Asset selling replaces asset buying Causes speculative bubble to “burst” destroying confidence People stop spending and economy goes into recession Excess growth and credit debt
39
Outside shocks hitting the economy
Demand and supply side shocks Effects AS and AD E.g effect on other countries from war in the Middle East Such as business confidence in UK falling Or lead to oil shortages effecting costs of production (supply side shock)
40
Climatic cycles
Weather may effect quality of harvests and prices of produce Effects business confidence and gives a rise to trade cycles
41
Benefits of economic growth
Increase living standards More environmentally friendly technology Higher business confidence- increase in investment- profits- growth Increases fiscal dividend tax revenue from growth Increased life expectancy
42
Cost of economic growth
May use up finite resources Pollution Environmental degradation Low business confidence Urbanisation/urban sprawl into agricultural land Wide inequalities in the distribution of income and wealth
43
Positive output gap
The level of actual real output in the economy > the trend output level
44
Negative output gap
The level of actual real output in the economy < the trend output lebel GDP is below productive potential
45
What are the two main measures of unemployment
Claimant count Labour force survey
46
Seasonal unemployment
Occurs when workers are laid off in a short term basis Mostly in trousism, agricultural and catering sector Caused by fluctuating weather or demand
47
Frictional unemployment
Usually short term and occurs when a worker switches between jobs
48
Features of frictional unemployment
Geographical immobility Occupational immobility
49
Structural unemployment
Long term unemployment offering when industries decline If automation reduces demand for human labour Associated with geographical and occupational immobility
50
Cyclical unemployment
Unemployment caused by a lack of AD in the economy and occurs when the economy goes into a recession or depression
51
Diagram for cyclical unemployment
Page 203
52
Analysis of cyclical unemployment diagram
Collapse in business/consumer confidence shifts AD leftwards Keysnian economist argue that price wages are sticky = defiencien AD persists Equilibrium level of national income falls
53
Anti Keynesian/free market view on cyclical unemployment
Assume markets for goods and labour are competitive Reducing costs of production will increase output It is temporary and self correcting Given that markets are sufficiently competitive and prices and wages are flexible
54
Real wage unemployment
Caused by real wages being stuck above equilibrium real wage
55
Draw real wage unemployment diagram
Page 204
56
What is created by real wage unemployment
Excess supply of labour
57
Free market economist views on real wage unemployment
It is temporary Market forces will fix problem bid down wage to wFE to get rid of excess supply Restores eFE
58
Voluntary unemployment
Refusal of job offers, choose to stay unemployed at current market wage rates
59
Involuntary unemployment
Willing to work for the current market real wage, but there are no jobs available/suitable for ghem
60
Natural rate of unemployment
Rate if unemployment When aggregate labour market is in equilibrium
61
Draw a diagram to show the natural rate of unemployment
Page 205
62
Analysis of natural rate of unemployment diagram
When ADL=ASL Full employment at eFE Distance between ASL and ADL shows frictional and structural unemployment in the economy EFE - E1 is the natural rate of unemployment
63
Consequences of unemployment
Economy produces inside PPF Reduction in international competitiveness Reduce incentives to invest in technology (which may increase exports) Higher business taxes firms must pay to help finance welfare benefits Widening of income differentials Marginalised from normal activity, risks to health, diet, social issues
64
Advantages to unemployment
Provdes downward pressure on wage rates and reduces inflation Income differentials provide an economic incentive
65
How can geographical immobility be removed
Subsidise moving costs Spending on rented social housing in areas of labour shortages
66
How can frictional unemployment be improved
Job seekers allowance/ universal benefit
67
Contributions based allowance
Can only be claimed in first months of unemployment, acts as an inventive
68
Real effective way to improve frictional and structural unemployment
Economic growth to increase demand of firms for employees
69
Improving structural unemployment
Govt spending on retraining schemes Supply side policies to improve competitiveness and efficiency of markets
70
Inflation in the 1970s
15%
71
Inflation in mid 1970s
25-26%
72
Equation of exchange
MV=PQ
73
Costs of inflation
Distributional effects Distortion of normal economic behaviour Breakdown in the functions of money International uncompetitiveness
74
Benign/good deflation
Reduces business cost of production Improvements. In supply side SRAS and LRAS curve shift to the right AD curve does not shift Price level falls
75
Malign/bad deflation
Collapse of aggregate demand Negative multiplier effects Credit crunch LRAS and SRAS does not shift AD shifts leftward Price level falls
76
Real value of debt during deflation
Rises Reduces net wealth Leads to lower spending

economics (33 decks)

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