Extract 1

Question 1

Recent Macroeconomic performance of UK: (3)

Answer 1

• GDP increasing slowly, just beginning to recover after recession
• unemployment falling as recovery takes place
• inflation is falling as well

Question 2

Output gap definition

Answer 2

Difference between actual and potential GDP

Question 3

Short Run economic growth

Answer 3

an increase in AD

Question 4

Long Run economic growth

Answer 4

Increase in LRAS of economy/ increase in productive capacity of economy

Question 5

Negative output gap

Answer 5

Actual GDP is below potential, aren’t utilising resources. Growth can occur without raising the price level

Question 6

Positive output gap

Answer 6

Actual GDP exceeds potential GDP. No spare capacity, growth likely to generate inflationary pressures

Question 7

Stages of economic cycle: Boom

Answer 7

Rate of economic growth exceeds the rate of growth of potential GDP so the output gap is narrowed

Question 8

Stages of economic cycle: slowdown

Answer 8

when the rate of economic growth begins to fall and approach zero

Question 9

Stages of economic cycle: Recession

Answer 9

When rate of economic growth becomes negative and real GDP actually falls

Question 10

Stages of economic cycle: Recovery

Answer 10

when economic growth becomes positive after a recession

Question 11

Causes of Short Run economic growth

Answer 11

SREG can be driven by changes any component in domestic demand (C + I + G) or international demand (X-M). E.g

• Increased wages
• increased G
• Increased consumer confidence

Question 12

Causes of Long Run economic growth

Answer 12

anything which increased productive capacity. Anything which changes the size or quality of Factors of Production (or makes economy more efficient. E.g

• Increase in capital
• Increase in working population
• Increase in labour productivity
• improvements in technology

Question 13

Causes of changes in Short Run Aggregate Supply (Firms cannot respond to changes in macro economy)

Answer 13

• Changes in labour costs
• Changes in input prices (raw materials, capital)
• Changes in Taxes and regulation

Question 14

Consequences of Economic Growth: Inflation

Answer 14

if Growth is a result of increases in AD that is not matched by increased in AS, inflation is likely to occur (depending on position of AD curve
(because resources become scarce)

Question 15

Consequences of Economic Growth: Employment

Answer 15

D for labour is a derived demand, increased in real GDP tend to lead to increases in demand for labour.
In long run, employment would also rise (LRAS curve shifts downwards)
However, firms may choose to employ workers abroad , depends on nature of growth and nature of unemployment (structural, etc)

Question 16

Consequences of Economic Growth: Balance of Payments

Answer 16

Increase in C affects balance of payments negatively as demand for/ volume of imports increases. However if growth is export led, BoP likely to improve or remain constant. LR economic growth less likely to worsen BoP as productivity increases

Question 17

Consequences of Economic Growth: Government’s fiscal position

Answer 17

Public sector net cash requirement (difference between gotv’t expenditure and revenue). Due to workings of automatic stabilisers, economic growth in SR is likely to improve PSNCR as taxation receipts increase and gov’t spending falls as in high rates of growth unemployment is likely to be lower. PSNCR will vary over economic cycle.

Question 18

Define long term unemployment

Answer 18

A period of being out of work and actively seeking employment for over 1 year

Question 19

Define unemployment rate

Answer 19

% of total labour force unemployed but willing, able and seeking a job

Question 20

Difference between actual and potential growth

Answer 20

Actual- increase in real GDP

Potential- increase long run expansion of an economy’s productive potential

Question 21

What is the complete definition of economic growth?

Answer 21

Economic growth is an increase in an economy’s AD in the short run, but an increase in productive potential in the long run.