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Economics MACRO > Economic Performance > Flashcards

Economic Performance Flashcards

1
Q

what is the definition of short run economic growth ?

A

where there is an increase in a country’s AD, causing an increase in the country real GDP.

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2
Q

what is the definition of long run economic growth ?

A

where there is an increase in the country’s quality and quantity of FOP, causing an increase in AS.

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3
Q

where does a positive output gap occur ?

A

where actual output is greater than predicted output

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4
Q

where does a negative output gap occur ?

A

where actual output is less than predicted output

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5
Q

what are the characteristic’s of an economic boom ?

A

*high rates of economic growth
*near full capacity
*near or at full employment
*demand-pull inflation

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6
Q

what are the characteristic’s of an economic recession ?

A
  • negative economic growth
  • lots of spare capacity
  • demand-deficient unemployment
  • low inflationary rates
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7
Q

what are the two ways of measuring unemployment ?

A

claimant count

labour force survey

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8
Q

how does the claimant count work ?

A

counts the number of people claiming unemployment related benefits

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9
Q

how does the labour force survey work ?

A

a sample of 100,000 people are selected at random and are asked to fill out a survey to determine whether they classify as unemployed:

  • been out of work for 4 weeks/ 1 month
  • able and willing to start work within 2 weeks
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10
Q

what is the significance of unemployment to consumers ?

A
  • less disposable income
  • standard of living may fall
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11
Q

what is the significance of unemployment to firms ?

A
  • larger pools for recruitment
  • wages will change
  • firms costs will change
  • consumer spending will change
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12
Q

what is the significance of unemployment to workers ?

A
  • waste of workers resources
  • could lose existing skills
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13
Q

what is the significance of unemployment to government ?

A
  • more spending on JSA ( job seekers allowance)
  • opportunity cost
  • less revenue received from income tax
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14
Q

what is the significance of unemployment to society ?

A
  • negative externalities in the form of crime and strain on healthcare due to a fall in standard of living and crime
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15
Q

what are the 4 types of unemployment ?

A
  • structural
  • frictional
  • seasonal
  • cyclical
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16
Q

what is structural unemployment ?

A

a long term decline in demand for goods and services in an industry costs jobs

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17
Q

what is frictional unemployment ?

A

the time between leaving a job and finding and securing a new job

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18
Q

what is seasonal unemployment ?

A

occurs during retain points in the year

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19
Q

what is cyclical unemployment ?

A

economic decline e.g. recession, lack of demand

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20
Q

what causes short run growth ?

A

Changes to any of the components of aggregate demand (AD)

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21
Q

what causes short run supply-side growth (SRAS) ?

A

A fall in the costs of production, a decrease in taxes, or an increase in the level of subsidies

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22
Q

what causes long-run economic growth ?

A

increase in the quality and quantity of production in the economy

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23
Q

what does trend rate growth refer to ?

A

long-term rate at which the economy expands over time

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24
Q

what are the benefits of economic growth ?

A
  • increased employment & higher incomes
  • higher GDP can lead to improved standards of living (better healthcare, education etc)
  • investments in infrastructure, improves overall economic efficiency
  • increased competition and innovation
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25
Q

what are the costs of economic growth ?

A
  • leads to negative externalities (air pollution, plastic waste etc)
  • depletion of natural resources
  • unequal distribution of wealth, income inequality
  • inflation
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26
Q

what does the economic cycle refer to ?

A

the changes in real GDP that occur in the economy overtime

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27
Q

what is the long-term trend rate of growth ?

A

it represents the sustainable rate of growth that an economy can achieve overtime

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28
Q

where are positive and negative output gaps on the economic cycle ?

A

the area between the trend rate growth line and the peak or trough

(humps)

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29
Q

what is a positive output gap ?

A

a growth of real GDP, that is above the trend

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30
Q

what is a negative output gap ?

A

a growth in real GDP, that is below the trend

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31
Q

what are the characteristics of a recession ?

A

. two consecutive quarters of negative growth

. high/ increasing unemployment

. increasing negative output gap

. low confidence for firms

. usually low inflation

32
Q

what are the characteristics of a boom ?

A

. increasing/ high rates of economic growth

. decreasing unemployment

. increasing positive output gap

. high confidence

. demand-pull inflation

. greater government budget

33
Q

what can indicate a positive output gap ?

A

rapidly rising prices

34
Q

what can indicate a negative output gap ?

A

rising unemployment

35
Q

what is involuntary unemployment ?

A

workers are willing to work but there are no jobs available

36
Q

what is voluntary unemployment ?

A

workers choose to remain unemployed

37
Q

how do the government respond to structural unemployment ?

A

focus on enhancing the unemployed individuals skills to improve their employability

38
Q

how do the government respond to seasonal unemployment ?

A

extend operational seasons

39
Q

how do the government respond to frictional unemployment ?

A

reduce workers search periods between jobs

40
Q

how do the government respond to cyclical unemployment ?

A

take measures to stimulate aggregate demand

41
Q

the effects of unemployment on the government ?

A

increased spending on unemployment related benefits

less tax revenue

42
Q

the effects of unemployment on the firms ?

A

loss of sales revenue

loss of production

43
Q

the effects of unemployment on the individuals ?

A

loss of income

health issues

44
Q

the effects of unemployment on the economy ?

A

increased crime

45
Q

what is the definition for inflation ?

A

the sustained increase in average price level of goods/services in an economy

46
Q

what is the definition for deflation ?

A

the sustained decrease in average price level of goods/services in an economy

47
Q

what is the definition for disinflation ?

A

the sustained increase in average price level of goods/services in an economy, but at a lower rate than before

48
Q

what causes demand-pull inflation ?

A

excess demand in the economy

(outward shift in AD)

49
Q

what causes cost-push inflation ?

A

increases in the costs of production

(inward shift in SRAS)

50
Q

what does fisher believe strongly influences inflation ?

A

the size of the money supply and the speed at which it circulates the economy

more money entering the circular flow of income is going to lead to an increase in consumption and investment leading to demand-pull inflation

51
Q

how does inflation impact firms ?

A

creates uncertainty

delays in investment

52
Q

how does inflation impact consumers ?

A

decrease in purchasing power

decrease in value of savings

fall in real income

53
Q

how does inflation impact the government ?

A

reduces international competitiveness (exports become more expensive)

economic growth may slow

unemployment may rise if we attempt to reduce inflation

54
Q

how does inflation impact workers ?

A

demand higher wages to compensate for higher living costs

inflation leading to a fall in standard of living may effect motivation and productivity may fall

55
Q

how is demand-side deflation caused ?

A

by a fall in total (aggregate) demand in the economy

causing average price level to fall

56
Q

what are the 6 common consequences of demand-side deflation ?

A

unemployment

consumers lose confidence

firms lose confidence

debt

bankruptcies

export increase (due to domestic prices falling)

57
Q

how is supply-side deflation caused ?

A

by increases in the productive capacity of the economy

(this is brought about by any increase in the quantity/quality of the factors of production)

creates excess supply

58
Q

what are the 6 common consequences of supply-side deflation ?

A

unemployment

consumers gain confidence

debt

firms gain confidence

exports increase

59
Q

what is imported inflation ?

A

occurs when the prices of goods and services imported from other countries increase, contributing to an overall rise in the domestic price level.

e.g. oil, food

60
Q

what is a commodity ?

A

something that is useful and valuable

61
Q

how can changes in other economies exchange rates affect inflation in the UK ?

A

affect the cost of imports and exports

inflation:
- (A depreciation of the UK pound could lead to higher import prices, increasing the price of imported goods for UK consumers and raising inflation)

  • (Conversely, a strengthening pound could lower import prices, dampening inflationary pressures)
62
Q

how can changes in other economies economic growth of trading partners affect inflation in the UK ?

A

Economic growth in other economies can affect demand for UK exports

inflation:
- (Strong economic growth in major trading partners may increase demand for UK exports, contributing to inflation in the UK)

  • (Conversely, weak economic growth in trading partners may reduce demand for UK exports, leading to lower prices and reducing inflation)
63
Q

how can changes in other economies global shocks affect inflation in the UK ?

A

Events like wars, political instability, or natural disasters in other economies can lead to global shocks

inflation:

  • (Global shocks tend to increase inflationary pressures)
64
Q

how will a positive output gap affect unemployment ?

A

high levels of real GDP in the economy.
Due to increased AD firms operate near or at full capacity
The demand for labour is high, leading to lower unemployment rates

65
Q

how will a negative output gap affect unemployment ?

A

low levels of real GDP in the economy.
Due to decreased AD firms operate at low capacity
The demand for labour is reduced, leading to higher unemployment rates

65
Q

how does a positive output gap impact inflation ?

A
  • In a positive output gap scenario, there is upward pressure on prices and wages
    ↓
  • With firms operating at or near full capacity, they may struggle to meet increasing demand, leading to higher production costs
    ↓
  • As a result, firms may raise prices, contributing to inflationary pressures
    ↓
  • Additionally, low unemployment can empower workers to demand higher wages,
66
Q

how does a negative output gap impact inflation ?

A
  • In a negative output gap scenario, there is downward pressure on prices and wages.
    ↓
  • High unemployment reduces workers bargaining power, making it difficult for them to negotiate higher wages
    ↓
  • As a result, firms may not face significant cost pressures, and there is a risk of deflation or very low inflation
66
Q

what does the short run phillips curve illustrate ?

A

a trade-off between unemployment and inflation

  • Rising inflation is often accompanied by falling unemployment
  • Rising unemployment is often accompanied by falling inflation
67
Q

what is the relationship between an increase in aggregate demand (AD) to inflation and unemployment ?

A

(inflation > unemployment)
- An increase in AD from AD1→AD2 causes a positive output gap (YFE - Y2)
With an increase in output the demand for labour rises and unemployment falls from 4% → 3%
The remaining labour in the market is scarcer and workers are able to negotiate higher wages
This causes wage inflation in the economy
Wage inflation leads to an increase in inflation from 3% → 4%

68
Q

what is the relationship between a decrease in aggregate demand (AD) to inflation and unemployment ?

A

(inflation < unemployment)
- A decrease in AD from AD1 → AD3 causes a negative output gap (YFE - Y3)
With a decrease in output, the demand for labour falls and unemployment rises from 4% → 5%
Labour is more abundant, and to get hired workers have to accept lower wages
This causes wage deflation in the economy
Wage deflation leads to a decrease in inflation from 3% → 2%

68
Q

what does the long run phillips curve illustrate ?

A

no trade-off between inflation and unemployment in the long run

the economy will always return to the natural rate of unemployment (NRU)
- this is because when inflation increases due to an increase in AD, worker will eventually demand higher wages to account for a rise in inflation, this will increase firms costs of production shifting SRAS inwards.
- this leads to a new short run phillips curve (SRPC) being adapted, to account for the shift in SRAS, where unemployment returns to the NRU.

69
Q

what does the LRPC look like on a diagram ?

A

a vertically straight line

70
Q

what is the LRPC similar to ?

A

the LRAS curve

71
Q

in the short run you can have small deviations in levels of employment in the economy

however …

in the long run employment will always return to the … ?

A

natural rate of unemployment (NRU)

72
Q

in the short run you can have small deviations in levels of output in the economy

however …

in the long run supply/ output will always return to the … ?

A

level of full employment

73
Q

what does the NAIRU stand for ?

A

non accelerating inflation rate of unemployment

74
Q

what is the NAIRU ?

A

the rate of unemployment where inflation is stable

Economics MACRO (5 decks)

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