Macroeconomic Aims 06

Question 1

defn of actual growth

Answer 1

the expansion or increase in an economy’s output or real GDP over time

Question 2

factors of actual growth

Answer 2

aggregate demand, SRAS and LRAS

Question 3

defn of potential growth

Answer 3

increase in the productive capacity of the economy. the productive capacity of the economy is the MAXIMUM OUTPUT the economy is capable of producing, considering the STATE OF TECHNOLOGY AND THE RESOURCES.

Question 4

defn of sustained growth

Answer 4

refers to an economy producing at its maximum or potential output.

Question 5

*benefits of actual growth (4 primary ones)

Answer 5

higher C, higher M-SOL
from the circular flow of income, a higher GDP leads to a higher household incomes and hence disposable incomes, which encourages autonomous consumption and hence a higher MPC. The increase in consumption causes the material well-being of the consumers to improve, hence causing a higher SOL of the average citizen when actual growth happens.

increases level of profits and revenue for producers

creates jobs and reduces unemployment
when the economy grows, more consumption is induced, which increases the output. To increase the production, more factors of labour is required, hence more individuals are employed and hence cyclical unemployment decreases.

sustained growth and inclusive growth
economic growth allows the government collect more tax revenues, which helps to finance projects that will helps in potential growth of the economy such as education.

Question 6

*costs of actual growth

Answer 6

dd-pull inflation
if potential growth is slower than actual growth, the capacity of the economy cannot cope with the demand, ie AD curve is at Yfe.

structural unemployment
low skilled workers are easily replaced by new machines.

environmental pollution, which leads to negative externalities

worsens income equality through the Gini coefficient, as the poor are usually low in skill levels and have a higher chance of being structurally unemployed.

Question 7

sustaiNABLE growth defn

Answer 7

the rate of growth that can be sustained without any significant economic problems, implies a positive and stable growth over time

Question 8

what stops sustainable growth

Answer 8

depletion of natural resources

environmental pollution

Question 9

achieving sustainable growth in Singapore

Answer 9

through correction of market failure:

1. provision of public goods (drainage system)
2. pricing in the externalities
3. rules and incentives
4. public education

Question 10

defn of unemployment

Answer 10

the number of people in the labour force that 1. is able to work and 2. is willing to work, yet 3. unable to find employment.

Question 11

different types of unemployment

Answer 11

cyclical: happens during a recession when AD falls, which causes the economy to contract as the output levels drop and theres a reduction in consumption. When businesses suffer a loss in revenue, they may retrench workers so as to lessen the loss in profit.

structural unemployment: mismatch between the job requirements and the unemployed skill set. can also be due technological advances

frictional unemployment: new job seekers face temporary unemployment when they first graduate or are retrenched as they do not have perfect information of the job availabilities in the economy.

Question 12

defn of full employment

Answer 12

enough jobs to match the number of job seekers

Question 13

reasons why full employment doesn’t occur

Answer 13

lack of information: job seekers may not know these jobs exist and time is required to find them
skills mismatch: lack of relevant skills

Question 14

*costs of high unemployment

Answer 14

reduced levels of consumption and hence lower SOL
the PP of the consumer is reduced when they are unemployment due to the absence of disposable income.
the stress that comes from unemployment also causes a decrease in the NM SOL

the lower demand for the producers goods causes revenues to fall.
the higher crime rates and pessimism about business during unemployment causes investors to lose confidence.

the decrease in consumption and investment in the economy causes the AD to fall by reverse multiplier.
tax revenue collected by the government is reduced to to the rising number of unemployed, which reduces the infrastructural improvements, hindering economic growth

Question 15

*benefits of unemployment

Answer 15

1. more efficient use of Human Resources
2. higher output, which means higher M SOL
3. tax revenues increase, G ^

Question 16

policies for each type of unemployment

Answer 16

cyclical: fiscal and monetary policy

structural unemployment: SSP policies (retraining)

frictional employment: provide job information

Question 17

types of inflation

Answer 17

MILD INFLATION(encouraged):
slow rise in prices by less than 2%. stimulates economic growth and expansion

CREEPING or MODERATE INFLATION
inflation rises at a substantial and persistent rate

HYPERINFLATION
inflation rises at an alarming rate, and normal economic activities may even break down.

Question 18

costs of inflation

Answer 18

lowers PP of money
same amount will be able to buy less goods and services.

discourages savings
consumers do not find the incentives to save since the inflation rate is higher than the nominal interest rate

impact of income distribution
some people benefit from inflation more so than others

shoe leather costs:
OC of time and effort vs counter-acting inflation
,
menu cost

hinders economic growth since inflation discourages both investment and saving

Question 19

benefits of low inflation:

Answer 19

being able to maintain or improve their current M SOL as the PP will be the same

no shoe leather costs (or no inefficiency or wastage in resources)

more investments as it is easier for investors to predict their revenues during a period of low inflation

promotes economic growth
causes national income to increase by multiplier effect, reducing cyclical unemployment

Question 20

costs of deflation:

Answer 20

postponement of consumption

when prices fall during deflation, consumers tend to be unwilling to spend as they anticipate further falling prices.

Question 21

cost push inflation defn:

Answer 21

when the SRAS increases due to increased cost of productions, while the AD is not affected, leading to a rise in the GPL

Question 22

Balance of Payment defn

Answer 22

record or overall statement of all economic transactions between residents of a country and the rest of the world, usually over a year.

consists of current account (X-M or BOT) and capital and financial account (FDI or hot money)