Economic Performance

Question 1

what is the difference between long run and short run growth in an economy

Answer 1

Short run growth is the percentage increase in a country’s real GDP and it is usually
measured annually. It is caused by increases in AD.

Long run economic growth occurs when the productive capacity of the economy is
increasing and it refers to the trend rate of growth of real national output in an
economy over time. It is caused by increases in AS.

Question 2

what is potential output

Answer 2

The potential output of an economy is what the economy could produce if resources
were fully employed.

Question 3

what is an output gap, and the two types

Answer 3

An output gap occurs when there is a difference between the actual level of output
and the potential level of output.

negative output gap

positive output gap

Question 4

what is a negative output gap

Answer 4

A negative output gap occurs when the actual level of output is less than the
potential level of output.

This puts downward pressure on inflation.

It usually means there is the unemployment of resources in an economy, so labour and capital are not used to
their full productive potential.

This means there is a lot of spare capacity in the
economy.

Question 5

what is a positive output gap, give a diagram

Answer 5

occurs when the actual level of output is greater than the
potential level of output.

It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts
upwards pressure on inflation.

e.g. china and India

diagram - https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.economicshelp.org%2Fblog%2Fglossary%2Foutput-gap%2F&psig=AOvVaw3FmXAwe67owbl_46c-AKej&ust=1684596934842000&source=images&cd=vfe&ved=0CBAQjRxqFwoTCMizzeDagf8CFQAAAAAdAAAAABAD

Question 6

what are the costs to consumers of economic growth

Answer 6

doesn’t benefit everyone equally -> Those on low and
fixed incomes might feel
worse off if there is high
inflation and inequality
could increase.

likely to be higher
demand-pull inflation,
due to higher levels of
consumer spending.

could face
more shoe leather costs,
which means they have to spend more time and
effort finding the best
deal while prices are
rising

law of diminishing returns -> benefits may not last after the first few units

Question 7

what are the benefits to consumers of economic growth

Answer 7

The average consumer
income increases as more
people are in employment
and wages increase.

Consumers feel more
confident in the economy,
which increases
consumption and leads to
higher living standards.

Question 8

costs to firms of economic growth

Answer 8

Firms could face more
menu costs as a result of
higher inflation. This
means they have to keep
changing their prices to
meet inflation.

Question 9

benefits of economic growth to firms

Answer 9

Firms might make more
profits, which might in
turn increase investment.

Higher levels of
investment could develop
new technologies to
improve productivity and
lower average costs in the
long run.

As firms grow, they can
take advantages of the
benefits of economies of
scale.

Question 10

costs to government of economic growth

Answer 10

Governments might
increase their spending
on healthcare if the
consumption of demerit
goods increases

Question 11

benefits to government of economic growth

Answer 11

The government budget
might improve, since
fewer people require
welfare payments and
more people will be
paying tax.

Question 12

the costs of economic growth to living standards

Answer 12

High levels of growth
could lead to damage to
the environment in the
long run, due to increase
negative externalities
from the consumption
and production of some
goods and services

Question 13

the benefits of economic growth to living standards

Answer 13

As consumer incomes
increase, some people
might show more concern
about the environment.

Also, economic growth
could lead to the
development of
technology to produce
goods and services more
greenly.

Higher average wages
mean consumers can
enjoy more goods and
services of a higher
quality.

Public services improve,
since governments have
higher tax revenues, so
they can afford to spend
on improving services. -> improve life expectancy and education levels

Question 14

when is economic growth sustainable

Answer 14

Growth is sustainable when the rate of economic growth can be maintained in the
long run, so future generations can enjoy the same rate of growth

Question 15

why is fast economic growth unsustainable

Answer 15

Fast economic growth today could mean that natural resources, such as oil, might
deplete, which would create environmental problems for future generations, and
mean the future rate of growth might be weak.

Question 16

when does unsustainable growth occur

Answer 16

Unsustainable growth occurs around the boom and bust sections of the business
cycle. These are essentially deviations from the trend rate of growth.

Question 17

why is growth that is financed by public debt unsustainable

Answer 17

might be difficult to pay back in the future + it doesn’t contribute to improvements in productivity

by being more productive -> growth is likely to be more sustainable -> since it increases the economy’s productive capacity -> more room to grow

Question 18

what is an asset price bubble

Answer 18

when the price of an asset is predicted to rise significantly

causes it to be traded more

demand for it exceeds supply so the price rises beyond its value

the bubble then bursts when the price steeply and suddenly falls to its ordinary level

causes panic and investors try and sell their assets

results in a loss of confidence and can lead to economic decline or a depression

Question 19

Destabilising speculation and animal spirits

Question 20

herding

Answer 20

Herding is the act of reacting to the behaviour of other economic agents rather than
the market. This might be because some investors think other economic agents are
better informed about the market, so they follow their actions. This can cause
instability in the market.

Question 21

voluntary unemployed

Answer 21

when a person chooses not to work at their current wage rate

could be because welfare payments are generous compared to real wages

a high income tax may also discourage people from working

Question 22

involuntary unemployment

Answer 22

when they are willing and able to work at the
current wage rate, but they cannot find work.

usually cyclical, when a firm has a decrease in AD due to the current climate of the economy or the time of year (seasonal unemployment) causing decreased derived demand for labour

when the economy experiences involuntary unemployment, its not working at full employment

Question 23

what are the different causes of unemployment

Answer 23

structural unemployment

frictional unemployment

seasonal unemployment

cyclical unemployment

real wage unemployment

Question 24

explain what is structural unemployment

Answer 24

occurs with a long term decline in demand in an industry -> which costs jobs as less sales therefore less revenue

people unemployed are unable to get new work as they don’t have the correct skills to do so (occupational immobility of labour)

geographical immobility of labour (not easy to move somewhere where work is available)

likely to remain unemployed in the LR as a result

Question 25

explain frictional unemployment

Answer 25

This is the time between leaving a job and looking for another job. It is common for
there to always be some frictional unemployment, and it is not particularly damaging
since it is only temporary.

e.g. the time between leaving uni and finding a job

this is why its rare to get 100% employment, people are always moving between jobs

Question 26

explain seasonal unemployment

Answer 26

more people or less people are employed in a firm depending on the time of year

e.g. more people will be employed in the tourism industry in the summer

Question 27

explain cyclical unemployment

Answer 27

caused by a lack of demand for goods and services, and it usually occurs
during periods of economic decline or recessions.

It is linked to a negative output
gap.

Firms are either forced to close or make workers redundant, because their
profits are falling due to decreased consumer spending, and they need to reduce
their costs.

Question 28

why can cyclical unemployment be caused by an increase in productivity

Answer 28

means each worker can produce a higher output, and therefore fewer workers
are needed to produce the same quantity of goods and services

Question 29

explain real wage unemployment

Answer 29

Wages above the market equilibrium may cause unemployment. This is because the
supply of labour exceeds demand.

draw a NMW diagram

Question 30

how do changes in the rest of the world affect unemployment in the UK

Answer 30

Globalisation also contributes to structural unemployment, since production in the
manufacturing sectors, such as in clothing or motor cars, moves abroad to countries
with lower labour costs -> workers trained to work at those companies in the UK become unemployed as the industry has declined in size or has removed itself from the economy

Migrants are usually of working age, so the supply of labour at all wage rates tends
to increase with more migration. There could be more competition to get a job due
to the rise in the size of the working population

Question 31

what are the consequences of unemployment

Answer 31

If consumers are unemployed, they have less disposable income and their standard
of living may fall as a result.

There are also psychological consequences of losing a job, which could affect the
mental health of workers

With a higher rate of unemployment, firms have a larger supply of labour to employ
from. This causes wages to fall, which would help firms reduce their costs.

firms may lose profits -> as increased number of unemployed people have less disposable income to spend

government has to spend more on JSA and gets less tax revenue as there is an increase in unemployment -> less money to spend on public services

Question 32

what is the unemployment rate when the labour market is at equilibrium

Answer 32

the natural rate of unemployment

includes the frictional level of unemployment, structural unemployment and workers who do not have the skills necessary for a job

Question 33

define inflation

Answer 33

the sustained rise in the general price level over time. This means that
the cost of living increases and the purchasing power of money decreases.

Question 34

define deflation

Answer 34

n is the opposite, where the average price level in the economy falls. There
is a negative inflation rate.

Question 35

define disinflation

Answer 35

the falling rate of inflation. This is when the average price level is still
rising, but to a slower extent. This means goods and services are relatively cheaper
now than a year ago, and the purchasing power of money has increased.

Question 36

what are the different causes of inflation

Answer 36

demand-pull inflation

cost-push inflation

Question 37

what is demand-pull inflation, and the main triggers for it

Answer 37

a cause of inflation

When aggregate
demand is growing unsustainably, there is pressure on resources. Producers
increase their prices and earn more profits. It usually occurs when resources
are fully employed.

main triggers:

depreciation in the exchange rate -> causes imports to be expensive + exports become cheaper -> AD rises

fiscal stimulus (e.g. lower taxes, more gov spending) -> consumers have more disposable income -> consumer spending increases

lower interest rates -> makes saving less attractive + spending more attractive -> increased consumer spending -> increased AD

high growth in UK export markets means UK exports increase and AD increases

Question 38

what is cost-push inflation, and the main triggers for it

Answer 38

a cause of inflation

changes in world commodity prices -> increased costs of production -> pass higher costs onto consumers as higher prices

more expensive labour -> e.g. trade unions argue a higher wage

expectations of inflation -> if consumers expect pay to rise -> may ask for higher wages to make up for this -> could trigger more inflation

depreciation in exchange rate -> makes factor inputs more expensive increasing costs of production for firms

Question 39

what is the effect of inflation on consumers

Answer 39

low and fixed income consumers hit hardest -> as necessities e.g. food, water cost more and they spend a higher proportion of their income on it

affects high incomes the least

if consumers have loans -> the value of the repayment will be lower -> the amount owed does not increase with inflation so the real value of debt decreases

Question 40

what is the effect of inflation on firms

Answer 40

low interest rates -> borrowing and investing is more attractive as less has to be paid back

with high inflation -> interest rates are likely to be higher -> so cost of investing will be higher and firms are less likely to invest

workers demand higher wages -> increased cost of production

firms may be less price competitive on a global scale if inflation is high-> unpredictable inflation will reduce business confidence as they are not aware of what their costs can be -> less investment

Question 41

what are the effects of inflation on government

Answer 41

the government will have to increase the value of the state pension and welfare payments

this is as because the cost of living is rising

Question 42

what are the effects of inflation on workers

Answer 42

Real incomes fall with inflation, so workers will have less disposable
income.

If firms face higher costs, there could be more redundancies when
firms try and cut their costs.

Question 43

what are the effects of deflation

Answer 43

Deflation discourages spending because it makes goods and services cheaper in the
future. Consumers believe that, if goods are cheaper tomorrow, it is not worthwhile
buying them today.

this can result in an economic decline -> increasing rate of unemployment

Deflation makes the real value of debt higher.

This means that consumers with high
levels of debt find it harder to pay it off, since a larger proportion of their income will
be used to make repayments.

more effects -https://www.physicsandmathstutor.com/pdf-pages/?pdf=https%3A%2F%2Fpmt.physicsandmathstutor.com%2Fdownload%2FEconomics%2FA-level%2FNotes%2FAQA%2FMacroeconomics%2F3-Economic-Performance%2Fc)%2520Inflation%2520and%2520deflation.pdf

Question 44

what is the quantity of money theory

Answer 44

The Quantity Theory of Money states that there is inflation if the money supply
increases at a faster rate than national income.

Question 45

what is fishers equation of exchange

Answer 45

Fisher’s equation of exchange is MV = PQ

M - refers to supply of money

V - velocity of circulation

P - the price level

Q - quantity of real goods sold

T - represents transactions (however difficult to measure T)

the value of expenditure on goods = the value of total output

Question 46

what is fishers equation of exchange argue

Answer 46

The equation argues that increasing the money supply causes inflation.

When the money supply increases, consumers have more money to spend. This
causes AD to shift to the right. Firms then increase supply in the short run. A positive
output gap occurs, which is inflationary.

As a result, more workers are employed, so wages increase. This means costs
increase for firms, so they put up prices.

This inflationary pressure means the real value of money falls. Since money can buy
less, there is a contraction in demand.

Workers demand higher wages to make up for the increase in inflation. This leads to
a left shift in the SRAS curve.

The output in the economy returns to equilibrium, but the price level is higher.