Introducing the National and International economy Flashcards
Explain Classical Economic Theory
Non Interventionist The market will sort itself out There are never any misallocated resources-the economy is always at full capacity
Explain De-industrialisation in the UK in the 70’s
A third of UK industry lost in 18 months at the start of Thatchers government
Explain 3 reasons for the de-industrialisation in the UK in the 70’s
Government crowding out the pirvate sector due to public sector expansion Long term decline/competitiveness of British industry
What is Long term unemployment
When workers are out of work for 6+ months Harder for them to be employed afterward
Define the NAIRU/Long run Phillips curve
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
What is Keynesian economic theory
Belief in the use of government intervention
Define voluntary unemployment
When people refuse to work at existing wage rates
What is the Fisher Equation of Exchange
MV=PT M=Stock of money, V=Velocity of circulation of money P=Price, T=Output (Transactions)
What is the Old Quantity Theory of Money
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
What is the Keynsian Demand pull Theory of Inflation
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
Define Frictional Unemployment
Short term transitional unemployment or ‘between jobs’ unemployment
Define structural unemployment
Occurs when certain industries decline because of long term changes in market conditions
What factor can affect frictional unemployment
Imperfect information Jobless may take time to become aware where jobs are available
Define Real Wage unemployment
A type of disequilibrium unemployment caused by real wage rates being too high to clear the labour market, resulting in excess supply of labour
Diagram for real wage unemployment
How do free market economists argue Real wage unemployment can be solved
By keeping the labour market competitive
The competitive forces will lower the real wage rate, eliminating excess supply and causing full employment
What is a point of evaluation against the belief of free market economists about real wage unemployment
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
Define Cyclical/Keynsian/Demand Deficient unemployment
Unemployment occuring in the downswing of the economic cycle, caused by a lack of AD
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
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
What was The Great Moderation
A period from 1993-2007 where the UK economy and many other economies experienced low inflation and steady growth
What is the Keynsian Cost push theory of inflation
A rising price level is caused by an increase in the costs of production
Especially wages
What is the Philips curve
A curve showing the apparent inverse relationship between the rate of inflation and unemployment rate
Explain the relationship shown by the Phillips Curve using the 2 Keynsian Theories of Inflation
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
Diagram showing both the LR and SR Phillips curves
