lesson 7 Flashcards
what is the chain for a positive output gap?
supply constraints
costs rise
markets clear as SRAS shifts
takes us back to natural position
what is the chain for a negative output gap?
negative output gap
spare capacity which is unemployment
costs drop as we have spare capacity
SRAS shifts
what are the traditional two main functions of a government?
to keep an army ready for defence
to administer justice
what is the laissez faire approach?
when the government intervene in our lives as little as possible. small government
what is the interventionist approach?
when government intervention is vital. big government
what are the arguments for a laissez faire government?
1) less government involvement. less tax they need to raise (so they don’t need to tax citizens more as there would be less government public spending so they have no need for more money). lower taxes means consumers have more disposable income and businesses have more money to invest.
2) governments can make mistakes and make matters worse
3) free markets usually provide a better outcome and they are more efficient when left alone
4) we should let businesses choose demand for people not the government
what are the arguments for an interventionist government?
1) government intervention is necessary for macroeconomic management of the economy to avoid dangers of high inflation and high unemployment
2) it provides workers with protection from unfair treatment from employers
3) citizens want a clean healthy environment
four key variables of macroeconomic management
inflation
unemployment
economic growth
balance of payments
why will we never have proper FULL employment, and why is 3% considered a good level of unemployment?
there will always be people between jobs, terminal illnesses or illness/ disabilities which inhibit work or laws/ restrictions on certain jobs
what is the natural rate of unemployment?
the idea there will always be some unemployment as there will always be people between jobs
demand for labour= supply of labour so there is no excess of either
what do new classical economists argue about the natural rate of unemployment?
that is can change
for example: when benefits are cut many people try and find jobs quicker
why is high inflation bad news?
because it reduces a countries international competitiveness, leading to fall in real income for those with wages that do not adjust with inflation
what do stable rates of inflation allow a government to do?
to plan and to encourage investment
in terms of getting down a current account deficit, how does protectionism impact it?
protectionism means to protect uk producers
this can be through taxing imports or setting quotas that limit the amount that can come into the country
it can also be through subsidising uk industries by artificially getting costs down
in terms of getting down a current account deficit, how does raising productivity impact it?
investing in education and training means better trained works which boosts productivity, lowers costs and overall economic growth
in terms of getting down a current account deficit, how does lowering the value of the pound impact it?
because it makes the prices of exports lower and increases the price of imports which makes us more competitive overall
what do we expect when we have growth?
falling unemployment
raising the quality of living standards
tax revenue increases
what is meant by an economy is failing to grow?
GDPs not rising
two advantages and two disadvantages of a long period of economic expansion
A: development, increase in confidence
D: inflation, excessive importing which results in a BOP deficit
explain why raising rates might help with inflation. but why it might not also work.
there will be less borrowing, so less consumption, resulting in lower AD so it shifts left, which eases inflation and supply constraints. inflation is caused by a rise in the general price level not demand.
however the rise in costs leads to rising oil prices which would be overall raise costs for firms which is productively inefficient as their output would now decrease in number. its also disadvantageous for consumers as this means higher prices due to the supply constraints.
why is hyper inflation seen as very worrying for he economy?
money loses its function as a medium of exchange as people may no longer accept it
why may unemployment be seen as a good thing?
eases supply constraints
