Macro Objectives

Question 1

Long run economic growth

Answer 1

Occurs when the productive capacity of the economy is
increasing and it refers to the trend rate of growth of real national output in an economy over time. It is caused by increases in AS.

Question 1

Short run Economics Growth

Answer 1

Percentage increase in a country’s real GDP and it is usually
measured annually. It is caused by increases in AD

Question 2

Negative Output Gap

Answer 2

Occurs when the actual level of output is less than the potential level of output. This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so labour and capital are not used to their full productive potential. This means there is a lot of spare capacity in the economy.

Question 3

Postive Output Gap

Answer 3

Occurs when the actual level of output is greater than the
potential level of output. It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation.

Question 4

Costs of Economic Growth

Answer 4

There is likely to be higher demand-pull inflation, due to higher levels of consumer spending.

Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.

Question 5

Positives of Economics Growth

Answer 5

The average consumer income increases as more people are in employment
and wages increase.

Firms might make more profits, which might in turn increase investment.
This is also driven by higher levels of business confidence.

The government budget might improve, since fewer people require welfare payments and more people will be paying tax.

Question 6

Negatives of Economic Growth

Answer 6

Create income inequality - low skilled wprkers may find it hard to get higher wages that other workers benefit from
Demand Pull inflation
A deficit in balance of payments because people on higher incomes buy more imports. Furthermore, firms may want to increase output and therefore increase imports.
Finite resources may be used up during economic growth, which may constrain growth in the future

Question 7

Good things about recessions

Answer 7

Discount retailers benefit from increase demand
Firms may face up to their inefficencies and in long term makes them more efficent.

Question 8

Best way to create long run Economic Growth

Answer 8

Supply-Side factors that improve productive potential of the economy (increasing quantity or quality)

Question 9

Demand side/supply side shocks

Answer 9

AD to increase or fall or AS to rise or fall

Question 10

Instability can be caused by

Answer 10

Excessive growth in credit and levels of debt
Destabilising speculation and asset price bubbles

Question 11

Unemployment good

Answer 11

Maximise production and raise standard of living

Question 12

Structural unemployment

Answer 12

Caused by a decline in a certain industry or occupation - usually due to change in consumer preferences or technological advances, or the availability of cheaper alternatives

Occupational - immobility occurs when some occupations amy decline over time, but the workers in these occupations dont have the skills required to be able to do the jobs that are available.

Geographical - where workers are unable to leave a region which has high unemployment to go the another region where there are jobs.

Question 13

Reasons for frictional unemployment

Answer 13

Generous welfare benefits
In a boom more jobs available
In slump shortage of jobs

Question 14

Real wage unemployment

Answer 14

Caused by real wages being pushed above the equilibrium level of employment.

Question 15

Consequences of unemployment

Answer 15

Unemployment will have lower incomes therefore spend less and reduce firms profits
Automatic Stabilisers
Workers unemployed for a long time might become outdated and less employable

Question 16

Causes of cost - push inflation

Answer 16

Rise in wages above any increase in productivity
Rise in cost of imported raw materials
A rise in indirect taxes

Question 17

Causes of demand-pull inflation

Answer 17

High consumer spending or high depmand for exports
The money supply growing faster than output
Bottleneck shortages - if demand grows qucker the supply and theres shortages, may cause firms to rise prices

Question 18

Fisher Equation

Answer 18

MV = PT

Question 19

Consequences of inflation

Answer 19

Standard of living of those on fixed or near-fixed incomes to fall

Countries competitiveness will be reduced by inflation as exports will cost more and imports cheaper.

Inflation creates uncertainity for firms which reduces investment

Question 20

2 types of Deflation

Answer 20

Malignant - Demand side deflation
Benign - Supply side delfation

Question 21

Consequences of Malignant deflation

Answer 21

Lower growth
Longer term, and spiral as people delay spending as prices will be cheaper in future, also positive real interest rates
Increased value of debt

Question 22

Positives of Benign deflation

Answer 22

Comes with higher growth
Falling prices for consumers
International competitveness

Question 23

Current account 4 sections

Answer 23

1. Trade in goods
2. Trade in services
3. Primary income (flow in out of country from employment or earlier investment)
4. Secondary income - eg. Aid

Question 24

Causes of BOP surplus or deficit

Answer 24

Economic growth - more income more imports, YED for imports is high will create more imports

Struggling to compete internationally - eg. not be able to compete with low cost of production of other countries.
Or due to rise in value of currency makes good more expensive and imports cheaper

External shocks - Rise in world prices of imported raw materials eg. oil price inelastic
Economics downturn of other countries causing less demand for exports

Question 25

Consequences of BOP deficit

Answer 25

Indicate economy is uncompetitive.
Might just mean people are wealthy enough to buy imports
Can result in fall of currency leading to higher import prices, increasing costs of production, cost pull inflation

Question 26

Consequences of BOP surplus

Answer 26

Show economy is competitive
However, surplus for prolonged time can cause stagflation, which means low domestic demand, which can lead to low/negative economic growth
Overreliance on exports

Question 27

How to correct imbalances in BOP deficit

Answer 27

Policies to reduce price of domestic goods, which should increase exports and imports (supply side policies)

Restrictions on imports - eg. Tariffs on imports, making them more expensive. However, may cause inflation if demand for imports is too price inelastic and may cause trade wars wars, reducing internal trade.

Devalue currency (fixed exchange rate) or Depriciate (floating exchange rate), will make exports cheaper and imports more expensive, however Marshall Learner Condition.

Question 28

Capital account includes

Answer 28

transfers of non-monetary and fixed assets eg. immigrants coming to UK, their assets get added to UKs total assets

Question 29

Financial account

Answer 29

FDI
Portfolio investment