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economics > economic performance > Flashcards

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
Q

balance of trade in goods

A

the part of the current account measuring payments for exports and imports

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26
Q

net investment income

A

diiference between inward and outward flows of investment income

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27
Q

example of foreign direct investment

A

BP investing in the construction of an oil refinery in the US gold coast region

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28
Q

short run growth

A

One factor is fixed e.g capital

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29
Q

Long run growth

A

Both labour and capital are variable, economy is not at full capacity

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30
Q

Trend growth rate

A

That rate at which output can grow, on a sustained basis, without putting pressure on inflatiom

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31
Q

Shifts of AD

A

Changes in C+I+G=(X-M)

32
Q

Shifts of AS

A

Investment
Technical progress
Increase in size of labour force

33
Q

Growth rate increase in 2002

A

2.5% to 2.75%

34
Q

UK growth rate in 2014

A

3%

35
Q

Phases in the economic cycle

A

Recovery
Boom
Peak
Recession
Trough

36
Q

What is a trough also known as

A

Depression

37
Q

Causes of change in the phases of the economi

A

Fluctuations in AD
Supply side factors
Political business cycle theory
Role of speculative bubbles
Outside economic shovks

38
Q

Role of speculative bubbles

A

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
Q

Outside shocks hitting the economy

A

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
Q

Climatic cycles

A

Weather may effect quality of harvests and prices of produce
Effects business confidence and gives a rise to trade cycles

41
Q

Benefits of economic growth

A

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
Q

Cost of economic growth

A

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
Q

Positive output gap

A

The level of actual real output in the economy > the trend output level

44
Q

Negative output gap

A

The level of actual real output in the economy < the trend output lebel
GDP is below productive potential

45
Q

What are the two main measures of unemployment

A

Claimant count
Labour force survey

46
Q

Seasonal unemployment

A

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
Q

Frictional unemployment

A

Usually short term and occurs when a worker switches between jobs

48
Q

Features of frictional unemployment

A

Geographical immobility
Occupational immobility

49
Q

Structural unemployment

A

Long term unemployment offering when industries decline
If automation reduces demand for human labour
Associated with geographical and occupational immobility

50
Q

Cyclical unemployment

A

Unemployment caused by a lack of AD in the economy and occurs when the economy goes into a recession or depression

51
Q

Diagram for cyclical unemployment

A

Page 203

52
Q

Analysis of cyclical unemployment diagram

A

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
Q

Anti Keynesian/free market view on cyclical unemployment

A

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
Q

Real wage unemployment

A

Caused by real wages being stuck above equilibrium real wage

55
Q

Draw real wage unemployment diagram

A

Page 204

56
Q

What is created by real wage unemployment

A

Excess supply of labour

57
Q

Free market economist views on real wage unemployment

A

It is temporary
Market forces will fix problem bid down wage to wFE to get rid of excess supply
Restores eFE

58
Q

Voluntary unemployment

A

Refusal of job offers, choose to stay unemployed at current market wage rates

59
Q

Involuntary unemployment

A

Willing to work for the current market real wage, but there are no jobs available/suitable for ghem

60
Q

Natural rate of unemployment

A

Rate if unemployment When aggregate labour market is in equilibrium

61
Q

Draw a diagram to show the natural rate of unemployment

A

Page 205

62
Q

Analysis of natural rate of unemployment diagram

A

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
Q

Consequences of unemployment

A

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
Q

Advantages to unemployment

A

Provdes downward pressure on wage rates and reduces inflation
Income differentials provide an economic incentive

65
Q

How can geographical immobility be removed

A

Subsidise moving costs
Spending on rented social housing in areas of labour shortages

66
Q

How can frictional unemployment be improved

A

Job seekers allowance/ universal benefit

67
Q

Contributions based allowance

A

Can only be claimed in first months of unemployment, acts as an inventive

68
Q

Real effective way to improve frictional and structural unemployment

A

Economic growth to increase demand of firms for employees

69
Q

Improving structural unemployment

A

Govt spending on retraining schemes
Supply side policies to improve competitiveness and efficiency of markets

70
Q

Inflation in the 1970s

A

15%

71
Q

Inflation in mid 1970s

A

25-26%

72
Q

Equation of exchange

A

MV=PQ

73
Q

Costs of inflation

A

Distributional effects
Distortion of normal economic behaviour
Breakdown in the functions of money
International uncompetitiveness

74
Q

Benign/good deflation

A

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
Q

Malign/bad deflation

A

Collapse of aggregate demand
Negative multiplier effects
Credit crunch
LRAS and SRAS does not shift
AD shifts leftward
Price level falls

76
Q

Real value of debt during deflation

A

Rises
Reduces net wealth
Leads to lower spending

economics (33 decks)

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