Macro Flashcards
What does aggregate demand mean
Total demand for goods + services in the economy
How do you calculate AD
AD = C + I + G + (X-M)
What does AD take into account
Consumer spending (C)
Investment spending (I)
Government spending(G)
Imports(X)
Exports(M)
What is the wealth effect
As price level decreases purchasing power of income increases
People are richer so spend more money
What is the trade effect (X-M)
As price levels decreases purchasing power exports become more competitive but imports become less competitive
Greater demand for exports so increase in revenue (increasing X)
Importantes become less competitive less spending on imports (M decreases)
What is the interest effect
As prive level decreases interest rates can be kept lower
If inflation is low then interest reates can be kept lower
Higher investment + spending
Reduces value of exchange rate
Why does AD shift
When C I G or (X-M) change independent of prive level
What happens to AD as price increases
At higher price levels CP(current price) consumers have less disposable income(money to spend)
High level UK exports will be relatively less competitive leading to lower exports
Shift in the AD is caused when real income
Higher income shifts AD to the right
What can cause a shift in AD
An increase in income leads to a shift right
Rise in investment exports or government spending
What determines consumer spending
Disposable income
Saving
Consumer confidence
House prices/wealth
Income tax/VAT
Interest rates
Cost of living
What is disposable income
Income after taxes + benefits
What effect does higher disposable income have on AD
Rising real wages would increase disposable income
And shift AD to the right
What effect does saving have on AD
If income stays constant but consumers want to increase their savings then consumption will fall
What effect does consumer confidence have on AD
If consumer are pessimistic about the future they will prefer to save pay off debt + reduce their current spending
Low confidence will shift AD to left
High confidence will encourage spending
What effect does house prices have on/ wealth have on consumer spending
Rising house prices tend to increase consumer spending through a positive wealth effect
If house prices rise
They could gain equity withdrawal
Re-mortgaging house + taking money to spend
They will also feel more confident if their house is worth more
What effect does income Tax/Vat do to consumer spending
A cut to income tax will increase the consumers disposable income encouraging spending
What effect does interest rates have on consumer spending
Lower interest rates reduce the cost of borrowing and encourage spending
Lower rates also make consumption more attractive than saving in the bank
How does cost of living cause an increase consumer spending
If wages stay the same cost of living goes down people will have more disposable income + spend more
What effect does investment have
Effects AD + AS is relatively more volatile is strongly influenced by confidence + changes in rate of economic growth
What factors affect investment
Confidence
Animal spirts
Interest rates
Availability of finance
Government regulation
Economic growth
How does confidence affect investment
If business are optimistic about future demand they will increase productive capacity and invest now
Business face uncertainty they will cut back on risky investments
How do animal spirits effect investment
Do people expect there business to grow
How does interest rate effect investment
Investment if often financed by borrowing or using savings
Lower interests rates make it cheaper to finance investment + make more projects worthwhile
How does availability of finance effect investment
Business may wish to borrow + invest but access to credit is a big issue
Banks maybe reluctant to give a small business a loan because it is risky investment
It depends on business finding other sources of credit such as the stock market or private market
How does government regulation effect investment
Some business may be put off investment because of heavy cost of regulation
The need to meet environmental standards + labour regulations
On the other hand government could encourage investment through offering regional subsidies
How does economic growth effect investment
A factor in determining investment is the rate of economic growth
Improvements in the rate of growth + AD will tend to increase investment
Demand from overseas + the demand for exports are also important
What is government expenditure/spending
Transfer payments + direct spending such as capital investment in public roads
How does a fiscal policy effect expenditure/spending
The government may choose to use fiscal policy to try + influence AD
In a recession the government could borrow more + spend on capital investment such as building new roads + railways
How is government expenditure/spending effected by economic cycle
In a period of high economic growth tax revenues tend to rise this gives the government more money to spend on service like NHS
How does the political cycle effect government expenditure
Government may cut spending after an election to try to + reduce the budget deficit then increase spending shortly before an election
What is net trade
Amount of trades with a specific partner
What factors effect net trade
Exchange rates
Economic growth
Competitiveness
Non-price factors
Tariffs + protectionist measures
How do exchange rates effect net trade
There is a depreciation of exchange rates Economic growth exports will be cheaper + imports more expensive
This will tend to increase (X-M) increasing AD
How does economic growth effect net trade
If the UK growth is relatively higher than other countries we will see a rise in imports spending
This will reduce net (X-M)
If there is strong growth in Europe this will lead to higher
(X-M) + higher AD
How does competitiveness effect net trade
The UK has a lower inflation rate than its competitors then UK exports will be com relatively cheaper
Improving competitiveness could be due to lower wages or higher productivity
How do non price factors effect net trade
The quality + desirability of UK goods + services will be important
If UK firms can produce better quality Goods + services with unique selling points
Demand for Uk exports will rise + the demand will be more inelastic
What effect do tariffs + protectionist measures
A country faced high tariffs on exports it would reduce demand
What is the accelerator effect
When investment levels are related to the rate of change of GDP
What causes the accelerator effect
An increase in rate of economic growth will have a corresponding larger increase in level of investment
Suggests that investment can be quite volatile
Economic downturn leads to a big drop in investment
What is saving
When we hold on to income and don’t spend (depositing money in a bank this is termed saving)
What is investment
Expenditure on capital goods
What does saving and investment do
Increase the productive capacity of the economy
What factors affect saving
Real interest rates
Confidence
Wealth
Demographics
How do real interest rates affect saving
Higher interest rates make it more attractive to save money in a bank because there is a better rate of return
How does confidence affect saving
If people are pessimistic about the future they will tend to save more
High confidence will encourage more spending + borrowing
What affect does wealth have on saving
Rising house prices may encourage people to spend more
Run down savings because they can always sell or re-mortgage their house
How does demographic affect saving
Old people are more likely to save than young people an ageing population could cause a rise in the savings ration
What can cause a sudden fall in AD
Global recession/credit crunch
Fall in house prices
Fall in business + consumer confidence
How does a global recession/credit crunch cause a sudden fall in AD
Cause a fall in demand for UK exports
How does a fall in house prices lead to a sudden fall in AD
It can lead to a negative wealth effect + falling AD
How does a fall in business and consumer confidence cause a sudden fall in AD
Due to an event such as a stock market crash
What is the multiplier effect
Happens when there is a change in injections causes a bigger final change in real GDP
How to calculate multipliers
Change in real GDP / change in injections
Why do we use the multiplier effect and the chain of events
If the economy is depressed + there is spare capacity + unemployed workers
If the government spends it will gain more then spent
Unemployed people will now have extra money to spend they will buy products from shops
Shopkeepers will see improved incomes + spend more
Why does the multiplier effect work
Initial spending doesn’t just stay with one person
It is know as a knock on effect
Higher spending leads to more income for other + further rounds of spending
What do injections and the multiplier effect effect causes to AD
Rise in injections causes AD to increase to AD to shift to AD2
Because of the multipliers effect + further rounds in spending we get an increase in AD to AD3
Causing a high final GDP
What has an affect on the multiplier effect
% of income
Confidence
Amount of imports (leakage from economy)
Why does % of consumer income affect the multiplier effect
This will be bigger if consumer spend a high % of income because higher initial injection
Why does confidence have an effect on the multiplier effect
If confidence is low people will hold onto there money the multiplier effect will be lower because initial injection decreases
Why is the multiplier effect affected on imports
Multiplier effect will also be lower if most of the spending goes on imports this causes a leakage from economy
What is the marginal propensity to consume (MPC)
The % of extra income that is spent ( high confidence high MPC)
What does high income lead to
More saving
Paying tax
Spending on imports
How do we calculate the size of multiplier
Multiplier and MPC have an effect on each other
What effects the size of the multiplier
Higher marginal propensity to consumer means higher multiplier
If consumers have high marginal propensity to consume means higher then there will be a bigger knock on effects through out economy
What will happen to the multiplier if extra money is not spent in the UK
If consumers receive extra money but non of it is spent in the UK there is no multiplier effect
What is aggregate supply
The total productive capacity of the economy
The sum of all individual supply curves
What does the AS curve show
The maximum potential output
What does AS have a strong correlation with
A production possibility frontier
How can companies increase AS in the short run
Firms will be able to increase capacity in response to high prices and demand
What is AS determined by
The Stock of capital quantity of labour
What properties does AS have in the short run
It is more elastic
Higher prices encourage firms to supply more
Take on more overtime workers
What happens to AS in the long run
It is determined by factors of production - land labour and capital
What factors affect short run aggregate supply
Factors that affect the Cost of production
The price of raw materials
Exchange rate
Taxes + subsidies
Money wages
How do exchange rages effect aggregate supply and what does it do to the AS curve
Devaluation in currency will increase the Cost of many imported raw materials such as oil
This shifts SRAS to the left
How do taxes and subsidies effect the SRAS curve
A rise in VAT or excise duty will increase the cost of goods + shift SRAS to the left
What affect does money and wages have on the AS curve
A rise in wages will increase the cost of firms and shift SRAS to the left
What determines the Long run AS curve
Quantity of factors of production + productivity of labour/capital
What does the Long run AS curve mean
It illustrates the normal capacity level of output in the economy
Full capacity
What factores affect LRAS
Size of population
Technology
Investment
Education skills vocational
Government polices
Attitudes towards enterprise a stable economic and political climate
Financial system
How does the size of the population or population increasing/decreasing effect the Long run average Supply curve
A rise in the number of working age people will increase the labour force
Increase the Labour force increases productive capacity
Working age population can be affected by birth rates + net migration
The UK labour force can increase due to net migration in the past decade
How does technology affect LRAS
Technological improvements are one of the biggest factors affecting labour productivity
The internet makes it easier for firms to check costs and prices
How does investment affect LRAS
If firms or the government invest in increasing the capital stock they will see higher AS in the Long run
How does education skill and vocational skills affect LRAS
Having an increase in all of these skill;s enable workers to be more productive + offer higher value increasing productive capacity
How does infrastructure affect LRAS
improving transport links reduce the cost of transport + encourage trade this is important for boosting productive capacity
How do government polices affect LRAS
The Government can affect the LRAS by its supply - side policies on education competitiveness + regulation
Privatisation + deregulation may increase efficiency + competitive pressure in industries like energy
How do attitudes towards an enterprise affect LRAS
A stable economic + political climate may encourage entrepreneurs to invest + develop business
How does the financial system affect LRAS
A strong Bankings system that can allow firms to gain credit for investment will increase productive capacity a fragile banking system could damage LRAS
What are the two views/model for LRAS
Classical
Keynesian
What are properties of the classical view of LRAS
It means LRAS is inelastic
A rise AD will cause inflation in the long run
Economic growth requires LRAS to shift to the right
What are the properties of a Keynesian view on the LRAS
There can be spare capacity in the long run (e.g prolonged recession)
An increase in AD can cause higher real GDP ( if there is spare capacity
When do you use which AS curve
It doesn’t matter that much
SRD use a SRAS
LRD use a LRAS
When do you use a Keynesian LRAS or a SRAS
If you want to show how AD can increase real GDP
What is a supply - side shock
If there is a rapid rise in the price of a good
We see a supply side shock in the economy
This leads to inflation + lower economic growth
What does a supply side shock do to the AS curve and what it Causes
If there is a rise in price of a good that firms need there cost will increase
Therefore cost of production increases
This causes SRAS to shift to the left
It leads to movement along AD curve leading to a higher prive level + lower real GDP
What would happen if the opposite of a supply side-shock happen
A fall in price of raw materials would have the opposite effect on SRAS and would shift to the right
What are other reasons a supply - side shock
Rapid devaluation
Rise in the price of commodities
Powerful trade union
Why does a rapid devaluation cause a supply side shock
Causes a rapid rise in price of imported goods
How does a rise in price of commodities cause a supply side shock
Rise in price of needs because the have to be purchased and have to increase cost to consumer
How does a powerful union cause a supply side shock
Powerful trade unions cause a rapid rise in wages therefore cost imncrease
What is GDP (gross domestic product)
Measures the value of goods + services produced in a economy
It also measures income/national expenditure
What is real GDP
It measures the GDP adjusting for the effects of inflation
It measures the actual purchasing power of consumers in an economy
What does GDP per capita mean and how’d you calculate it
It is the level of GDP divided by population
Real GDP - population rise = real GDP per capita (percent)
What is economic growth
An increase in real GDP referring to an increase in total value of goods + services produced in an economy GDP
How do you measure the rate of economic growth
It is measured by the annual % change in real GDP
What is the Long run trend rate of economic growth
The Long run trend is the sustainable rate of economic growth in an economy
It depends on the growth of the LRAS/productive capacity
What does the Long run trend rate of economic growth show
The growth in real GDP compared to the trend rate of growth this can show a recession or growth
How do we know if there is economic growth in the short run
If there is spare capacity - in the short run an increase in AD causes an increase in real GDP
What are the demand side factors that increase economic growth
Lower interest rates
Rising house prices
Lower taxes
Higher confidence
Rising exports
What causes economic growth in the short term
Demand side factors
How does low interest rates cause economic growth in the short run
It reduces the cost of borrowing + leading to higher investment + higher consumption
How does rising house prices cause short run economic growth
Leads to the positive wealth effect encouraging consumer spending
How do lower taxes cause growth in the short run
Increases disposable income
How does higher confidence in the economy cause economic growth in the short run
Encourages spending + investment
How does a rise in exports cause economic growth in the short run
From higher growth in other countries
What are limits to economic growth in the short run
In the short run there is a limit to how much AD can increase economic growth
Economic growth is limited by productive capacity if demand is greater than supply firms will respond by pushing up prices
What does a increase in LRAS correlate to
An increase in LRAS also correlates to a shift in the PPF
What can we see in Long run economic growth
An increase in LRAS + AD
What does a rise in LRAS represent
An increase in the productive capacity of the economy
What factors effect LRAS
Investment in (productive capacity)
Education + training
Technology
Infrastructure
Net migration
How does investment cause an increase LRAS
An increase in investment in productive capacity
Inward investment from overseas(multinational firms)
How does education + training increase LRAS
Better education and trading causes an increase in labour productivity
How does an improvement in technology effect LRAS
Improvement in technology leads to lower costs of production
How does improvement in infrastructure effect LRAS
An improvement in infrastructure such as transport
What is infrastructure
The fundamental physical system that support a region nation or business
How does net migration effect LRAS
A increase in net migration causes a rise in labour supply
What is the economic/ trade cycle
The rate of economic growth can be variable
What is a Boom phase of economic growth
A period of growth above the long run trend rate
What can cause a boom phase of economic growth
A rise in spending on imports causing a current account deficit
A positive output gap
AD rising higher then AS
What positive things can happen during a boom phase of the economy
Falling unemployment
Rapid rise in investment
Asset prices increasing (positive wealth)
Rapid growth in credit
Consumer + business confidence
What is a draw back of a Boom phase of economic growth
Inflation
Why do asset prices increase during a boom phase and what this causes
Asset prices increase due to over exuberance and demand rising higher than supply
This causes the wealth effect and more spending
Why is there rapid growth in credit in a Boom phase of the economy
Consumers borrow more to finance higher consumption + investment levels
What is herding and when does it usually occur
Where people copy the behaviour of others
In a economic boom phase
How does a Boom phase cause higher levels of confidence
High level of consumer confidence is due to the animal spirits of businessmen
Why would there be a fall in unemployment during a Boom phase of the economy
Because AD is rising faster than AS business will need to employee more people to meet demand
Why is there a rapid rise in investment
People are employed so more money business are receiving more because AD is rising faster then AS
What is a recession
2 consecutive queers of negative growth
What happens in recession/downturn phase of economic growth
Rising unemployment
Falling GDP
Fall in investment
Fall in assets price such as housing
Negative confidence
Negative output gap
Why during a recession phase does unemployment rise
Because AS is greater then AD
This causes a demand deficient/ cyclical unemployment)
What increases during a recession phase
Improvement in current accounts as import spending falls
Why is there a fall in investment during a recession phase
AD is less than AS therefore consumers are more limited with where they spend there income
Why do asset prices fall during a recession phase
People have less income therefore the price of everything is less so people can still afford with less disposable income
Why does a recession lead to negative confidence
People are unsure about there future because they may be unemployed or not have much income so are not sure
What does it mean if there is a stable period of economic growth
It means growth rate is close to long run trend rate
And the rate of growth is sustainable for a long time
What happens when there is stable economic growth
Low unemployment
Balance of payment
Asset prices stable
Level of borrowing and saving stable
Stable/low inflation
Why is there a low unemployment when there is a stable economic growth
Because AD is growing at a similar rate to AS therefore people are needed to supply needs
Why is there a balance of payments in stable economic growth
Because AD is similar to AS so a similar amount of people are saving as borrowing
When there is a stable economy why is there no Boom in asset price and stable levels of borrowing and saving
AD is growing similar to AS so peoples assets prices aren’t rising because interest rates are pretty similar so people have lower opportunity cost when picking to save or borrow
What is a output gap
Difference between potential GDP + actual GDP
Why do we have positive/negative output gaps
In the real world the rate of economic growth is rarely constant
What is positive output gap and when does it happen
When actual economic growth is above the sustainable potential
When AD is increasing faster than AS
What happens in the short run of positive output
Firms will temporarily produce at a higher price and GDP and employment will be greater
Increases output in the short run
What happens if we try to use a positive output gap in the Long run
Stretches potential output + is unsustainable in the Long run
What happens to the economy when there is a positive output put gap (benefits)
Low unemployment
Deterioration in current account balance of payments
What happens to a economy when there is a positive output gap (negatives)
Inflation
Can lead to a economic downturn
Deterioration of current account balance
Inflation
Why does a positive output gap cause inflation
AD is increasing faster than AS
So companies will have to employee more people but then workers will as for a increase in wages and increase costs
Why when there is a positive output Gap is unemployment
Because the AD increasing faster then AS
Means more employees are needled to supply so the company can meet that demand
Why do central banks put up interest rates during a positive output gap
It is so they can deal with inflation by putting interest rates
Why does the positive output gap not work in the Long run
It is unsustainable + may lead to an economic downturn
Why is there a deterioration in current account balance of payments
Because AD is increasing therefore more imports and less injection because of a leakage
What is negative output and when does it happen
Negative output gap occurs when economic growth is below
Sustainable potential Firms
Real GDP is less than potential
What causes a negative output gap
Cutting government expenditure
Falling house prices
Rapid rise in interest rates
What does a low rate of growth mean
A recession
What is austerity
Cutting government expenditure
How does falling house cause a negative output
There will be a fall in the wealth + consumer spending
Meaning AS Will fall because AD
How does a rapid rise in interest rates cause a negative output gap
Increases cost of borrowing therefore people are spending less and not investing in the economy so lowers circular flow
What are the impacts of a negative output gap
Resources are wasted
Low rates/ negative rates of economic growth
Inflation falling below target
Fall in investment
High government borrowing
Why does a negative output gap cause resources to be wasted
It increases unemployment therefore people who can work and want to work but no spaces
Why does a negative output gap cause low rates/ negative rates of economic growth
Because GDP is decreasing because AD is lower then AS
How does a negative output gap cause inflation to fall below target
It falls because business have no need to charge higher if they have a Surplus left when there limited customers are buying
How does negative output gap lead to a fall in investment
Because people are less confident and business so people aren’t gonna spend there income in anything but the essentials
How does negative output gap lead to higher government borrowing
There is a fall in tax revenue because unemployment has risen
And spending higher on benefits for those unemployed
What is unemployment
When someone is not in work but actively seeking work and willing to take a job
What is under employment and why does it happen
Occurs when someone is working part time but would prefer to work full-time
When does economic inactivity happen
Occurs when people are not in the labour force
They are neither looking for work
What makes someone inactive in a economy
They could include categories such as early retirement
Disillusioned long term unemployed and long term sickness
How do we measure unemployment
Claimant count method
What is the claimant count method
The official government method of calculating unemployment
It counts the number of people receiving benefits
What are the problems with the claimant count
It excludes many who might be looking for work it excludes people over 60/under 18 people on government training schemes + married women looking to return to work
Strict rules
Some people may claim benefits whilst still working in the ‘black market’
Why is it a problem the claimant count excludes people
Some people may be needing support and not receiving it making it harder for them to find a job
Why is it a problem that the claimant count has very strict rules
You can lose your Jobseeker’s Allowance if you miss an interview
Why is it a problem that the claimant count count doesn’t take into account illegal activities
Some people claim benefits whilst still working in the black market
Meaning that expenditure is being spent on demerit goods
What is the labour force survey
This survey asks 60000 people whether they were unemployed and weather they were looking for a job
What type of people does the labour force survey use and take into account
It includes some people who are not eligible for benefits but who still meet criteria of being unemployed
What are the economic costs of unemployment
Loss of earnings/living standards
Difficult getting work in the future
Personal cost and on nhs
Increased government borrowing
Lower GDP
Increase social division
Why does unemployment cause a lower living standard
Loss of earnings for unemployment leading to lower living standards
Why does unemployment make it more difficult to get work in the future
It becomes more difficult to get work in the future as the unemployed lose ‘on the job-skills’ and may become less attractive to future employers
How does unemployment cause extra costs
Stress and health problems of being unemployed imposing personal costs and also costs onto the NHS
How does unemployment cause an increase in government borrowing
Government will have to spend more on unemployment and related benefits and will receive lower income tax revenue because fewer people are working
How does unemployment cause lower GDP
There will be a possibly negative multiplier therefore money is leaking out of the economy because products aren’t being made
How does unemployment cause a greater social divide
Unemployed are getting worse while the employed are getting better
What causes unemployment
Frictional unemployment
Structural unemployment
Classical or real wage unemployment
Demand deficient or cyclical unemployment
Voluntary unemployment
Seasonal unemployment
What is frictional unemployment and who does it effect
Unemployment caused by people moving between jobs
Graduates or people changing jobs
Why will there always be frictional unemployment
It takes time to find a job
What is structural unemployment
Unemployment due to a mismatch of skills in the labour market
What causes structural unemployment
Occupational immobility
Geographical immobility
What is occupational immobility
The difficulties in learning new skills applicable to a new industry and technological change
An example of occupational immobility
A former manual labourer may find it hard to retrain in a new high tech industry
What is geographical immobility
A difficulty in moving regions to get a job
Where is higher unemployment
In depressed regions
What is the classical or real-wage unemployment
Occurs when wages in a competitive labour market are pushed above the equilibrium
What causes classical or real-wage unemployment and why does it happen
Caused by minimum wages or trade unions
In a competitive labour market a minimum wage above the eq will cause a real wage unemployment of Q3 - Q1
Why is it a concern if the minimum wage is set above the eq
Rapid rise in the minimum wage (to a living wage) may cause unemployment in low - paid industries such as catering
What is demand deficient/cyclical unemployment
Occurs when AD leads to a decline in national income
An example of demand deficient/ cyclical unemployment
European recession would cause less demand for UK exports and goods
Therefore UK firms will employ less workers
Why does a fall in AD lead to a decline in national income
Less people are demanding goods therefore less workers and less wagers received
What is voluntary unemployment
Occurs when people turn down the opportunity to work at the going wage rate
What are the two types of voluntary unemployment
Generous unemployment
Involuntary unemployment
What is generous unemployment
Benefits may encourage people to stay on benefits rather than take a job
What is involuntary unemployment
When people are unable to get a job at the going wage rate
What causes involuntary unemployment
Structural or frictional unemployment
What causes generous unemployment
Benefits being to good
What is seasonal unemployment
A temporary period of unemployment that happens when demand for certain jobs fluctuates with the seasons
An example of season unemployment
Tourists off season unemployment rates will be higher
What does the government do to unemployment statistics
Often seasonally adjusted to take into account lower rates during busy time periods
When is there natural rate of unemployment
When the labour market is in equilibrium
How do you calculate natural rate and what is it
It is the difference between those who would like a job at the current wage rate and those whom are willing to and able to take the Job
What does natural rate of unemployment include
Frictional and structural unemployment
What causes frictional and structural unemployment
Causes supply-side factors rather than demand side factors
What determines the natural rate of unemployment
Availability of Job information
Quality of education and retraining scheme
Degree of geographical labour mobility
Flexibility of labour market
Hysteresis
Monetarists
Why does quality of education and retraining scheme determine natural rate of unemployment
Affects levels of occupational immobilities
If people can’t adapt to the new job they will be unable to work in that field
Why does the degree of geographical labour mobility effect the natural rate of unemployment
Workers can move to where jobs are available
Why does flexibility of labour market effect natural rate of unemployment
Powerful trade unions may be able to restrict the supply of labour certain labour markets meaning AS will fall and there will be a shortage of a good
What is hysteresis
A rise in unemployment caused by a recession may cause the natural rate of unemployment to increase
Why does hysteresis determine the natural rate of unemployment
When workers are unemployed for a time period they become deskilled and demotivated
What is monetarists
Unemployment is primarily due to supply-side factors
How does monetarists determine unemployment
Natural rate of unemployment will only be temporary
How to change the natural rate of unemployment
Increase labour market flexibility
Privatisation
Lower wages increases
How does increasing labour market flexibility change natural rate of unemployment
Less powerful unions therefore less bargaining power
What is privatisation
Transfer of a business service or asset from the public sector to the private sector
How does privatisation change the natural rate of unemployment
Can help increase the competitiveness of the industry leading to more flexible labour markets
How do lower wages increasing cause a changing natural rate of unemployment
Lower wages increasing making firms more willing to keep workers
What are policies to reduce unemployment
Fiscal and monetary policy
Education and training
Better job information and interview practice
Lower benefits and taxes
Reducing minimum wages
Regional grants
When do we use a fiscal and monetary policy to reduce unemployment
When there is a demand deficient unemployment
What is done during a fiscal policy during unemployment
They words cut income tax to boost consumer spending and aggregate demand
What effect should a fiscal policy have
High AD should lead to higher economic growth and should encourage firms to take on more workers
What is a drawback of using a fiscal policy
A demand-side policy may cause higher rates of inflation and reduce supply side unemployment like structural unemployment
When do we use education and training to reduce unemployment
When there is structural unemployment
What is done when education and training
They offer retraining and new skills for long term unemployed
What effect does education and training have on unemployment
Gives a better opportunity for the unemployed to find work in new industries
What is a drawback of using education and training
It would cost money and it may not prove difficult for some older workers to retrain in new industries and develop new skills
Why would better job information and interview practice reduce unemployment
gives the unemployed better information about available job vacancies and offers tips for the unemployed
When do we use better information and interview practices
When there is frictional unemployment
What is the intended effect of better job information and interview practice
Help to reduce frictional unemployment
How do lower benefits and taxes reduce unemployment
Increase the incentive for the unemployed to look for work rather than stay on benefits
What is the aim of lower benefits and taxes
Reduce frictional unemployment
What is a drawback of lowering benefits and taxes
Benefits in the UK are already quite low reducing benefits may increase poverty but will not create any jobs
How does reducing the minimum wage reduce unemployment
The minimum wage is above the equilibrium reducing it to the equilibrium will enable firms to employ more workers
What is the aim of reducing minimum wages
To reduce real-wage unemployment
What is a drawback of reducing minimum wages
Demand for labour may be quite inelastic
Cutting wages may just make firms more profitable
What is the aim of regional grants
To help overcome geographical unemployment
How do regional grants help overcome geographical unemployment
Encourages firms to set up in depressed areas helping workers to move to areas of high demand
What is a drawback of using a regional grant
Subsidies may prove ineffective for encouraging workers to move because they may be attached to their local community
Firms may have similar reluctance to set up in depressed areas because of a lack of infrastructure
What are the economic objectives
Growth
Unemployment
Inflation
Trade
Distribution of income
What is growth about in macro goals
Income and living standards
What is the economic objective of growth
To be strong and sustainable
What is unemployment about in macro goals
About people who don’t have jobs
What is the economic objective of unemployment
Low unemployment
Full employment
What is inflation in macro goals
They rate of growth of prices
What is the economic objective of inflation
For it to be stable and low 2%(+/-1%)
What is trade in macro goals
The value of imports compared to the value of exports
What is a economic objective of trade
Balanced
What is the macro goal about distribution
How income i given out
What is an economic objective of distribution of income
It’s fair
How do you remember the macro goals
TIGERS
What are the non core economic objectives
Sound government finances
Environmental sustainability
Productivity growth
What are forms of injections in circulars flow of income
Investments (I)
Government (G)
Exports(X)
What are forms of leakages in circular flow of income
Imports (M)
Savings (S)
Taxation (T)
What does it mean for an economy if injections are greater then leakages
There is economic growth
I + X + G > S + T + M
What does it mean if leakages are greater then injections
There is an economic recession
I + G + X < S + T + M
What does it mean if leakages and equal to in injections
No economics growth
I + G + X = S + T + M
