Introducing the National and International economy

Question 1

Explain Classical Economic Theory

Answer 1

Non Interventionist The market will sort itself out There are never any misallocated resources-the economy is always at full capacity

Question 2

Explain De-industrialisation in the UK in the 70’s

Answer 2

A third of UK industry lost in 18 months at the start of Thatchers government

Question 3

Explain 3 reasons for the de-industrialisation in the UK in the 70’s

Answer 3

Government crowding out the pirvate sector due to public sector expansion Long term decline/competitiveness of British industry

Question 4

What is Long term unemployment

Answer 4

When workers are out of work for 6+ months Harder for them to be employed afterward

Question 5

Define the NAIRU/Long run Phillips curve

Answer 5

The non-accelerating inflation rate of unemployment Last level of unemployment consistent with stable prices.

In the LR

Below it, firms will lay off workers they just took on to decrease their costs of production

Thus offsetting the increase in their costs due to the increase in the price level as shown in the Phillips curve

Question 6

What is Keynesian economic theory

Answer 6

Belief in the use of government intervention

Question 7

Define voluntary unemployment

Answer 7

When people refuse to work at existing wage rates

Question 8

What is the Fisher Equation of Exchange

Answer 8

MV=PT M=Stock of money, V=Velocity of circulation of money P=Price, T=Output (Transactions)

Question 9

What is the Old Quantity Theory of Money

Answer 9

Classical economist theory of inflation

The theory of inflation, dating to the 1800s The government increasing the money supply in the economy causing excess demand is what causes inflation Using fishers equation of exchange, MV=PT V and T are constant in the SR

Question 10

What is the Keynsian Demand pull Theory of Inflation

Answer 10

Theory that inflation is caused by the real economy and behavioural factors that cause AD to exceed AS

However, government policy decisions are usually the cause of the increase in AD

Question 11

Define Frictional Unemployment

Answer 11

Short term transitional unemployment or ‘between jobs’ unemployment

Question 12

Define structural unemployment

Answer 12

Occurs when certain industries decline because of long term changes in market conditions

Question 13

What factor can affect frictional unemployment

Answer 13

Imperfect information Jobless may take time to become aware where jobs are available

Question 14

Define Real Wage unemployment

Answer 14

A type of disequilibrium unemployment caused by real wage rates being too high to clear the labour market, resulting in excess supply of labour

Question 15

Diagram for real wage unemployment

Answer 15

Question 16

How do free market economists argue Real wage unemployment can be solved

Answer 16

By keeping the labour market competitive

The competitive forces will lower the real wage rate, eliminating excess supply and causing full employment

Question 17

What is a point of evaluation against the belief of free market economists about real wage unemployment

Answer 17

Doesn’t account for labour market rigidity

Caused by labour market imperfections, eg trade unions

Will stop the market from clearing itself, real wage unemployment will stay

Question 18

Define Cyclical/Keynsian/Demand Deficient unemployment

Answer 18

Unemployment occuring in the downswing of the economic cycle, caused by a lack of AD

Question 19

How do free market economists believe Cyclical unemployment is fixed

What diagram can be used to explain this

What do Keynesian economists say against this

Answer 19

By self regulating market forces

After a leftward shift in AD, SRAS will fall so economy will still be producing at the normal level of output and getting rid of unemployment

Keynesian economists believe that a sticky wage rate will stop SRAS from shifting down, causing output to fall and keeping the unemployment

Question 20

What was The Great Moderation

Answer 20

A period from 1993-2007 where the UK economy and many other economies experienced low inflation and steady growth

Question 21

What is the Keynsian Cost push theory of inflation

Answer 21

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

Especially wages

Question 22

What is the Philips curve

Answer 22

A curve showing the apparent inverse relationship between the rate of inflation and unemployment rate

Question 23

Explain the relationship shown by the Phillips Curve using the 2 Keynsian Theories of Inflation

Answer 23

Demand Pull:

Falling unemployment is caused by increasing AD, so firms demand more labour. Thus pulling up the wage rate

Cost Push:

Falling unemployment means trade union power increases as more people are working, joining them. So Trade Unions can use their power to push up wages

Question 24

Diagram showing both the LR and SR Phillips curves

Answer 24