Macroeconomics part 2

Question 1

Unemployment

Answer 1

People able, available and willing to find work and actively seeking work but not employed

Question 2

What’s unemployment measured by?

Answer 2

Claimant count-number of people claiming job seekers allowance

Labour force survey- Done by ILO

Question 3

What is seasonal unemployment?

Answer 3

When workers are unemployed at certain times of the year

Question 4

What is structural unemployment?

Answer 4

unemployment that occurs when the demand for labour is less than the supply of labour in an individual labour market

Question 5

What is cyclical unemployment?

Answer 5

Demand deficient unemployment that occurs as a result of economic cycle caused by fall in AD (Think of negative output gap)

Question 6

What is frictional unemployment?

Answer 6

People between jobs. includes new and returning entrants in the labour market. Typically short term

Question 7

Inemployment

Answer 7

people who are either working for firm or other organisations, or self employed

Question 8

Economically inactive

Answer 8

Those people of working age who are not looking for work, for a variety of reasons

Question 9

Discourage workers

Answer 9

people who have been unable to find employment and who are no longer looking for work

Question 10

work force

Answer 10

people who are economically active-in employment or unemployed

Question 11

full employment

Answer 11

a situation where people who are economically active in the work force and are willing and able to work are able to find employment

Question 12

Real wage unemployment

Answer 12

When the real wage for a job is set above the equilibrium wage rate. It means there will be an excess supply of labour unemployment

Question 13

Give an example of when real wage unemployment might occur and say why

Answer 13

An example of when real wage unemployment might occur is when government impose a minimum wage. This is because …

workers have a greater incentive to supply more hours of labour, as the reward per hour of work is greater

However, the demand for labour falls as firms have less incentive to employ workers at a higher wage rate

Question 14

Technological unemployment

Answer 14

Occurs when improved capital, which may be more productive and efficient than labour, replaces labour as a factor of production

Question 15

Regional unemployment

Answer 15

Linked to structural unemployment and occurs within particulars towns/cities/regions

This is often because of the area specialises in production of good or provision of service that is no longer demanded or is produced in cheaper economies, consequently demand further drops locally.

Question 16

Public sector

Answer 16

People employed by governemnt

Question 17

Private sector

Answer 17

People employed by firms

Question 18

Whats the diffidence between level and rate of unemployment?

Answer 18

Level of unemployment=number of people unemployed

rate of unemployment=number of people unemployed as a % of the labour force

Question 19

Economic cost of high unemployment

Answer 19

Lost output
fall in real income and lower living standards
drop in tax revenues and higher welfare (link to budget deficit)
possible decline in labour supply as unemployed more overseas

Question 20

Social cost of high unemployment

Answer 20

Increase in relative poverty and welfare benefit dependency
Extra demands on NHS (due to stress)
Link between persistent unemployment and social problems

Question 21

beneficial effects of high unemployment

Answer 21

Reduce risk of inflation-lower wage claims and price discounts
Pool of unemployed labour available for growing business’
Rise in self employment start ups

Question 22

In the long-run, the ability of an economy to produce goods and services to meet demand is based on the state of:

Answer 22

Production, technology and the availability and quality of factor inputs

Question 23

What shifts LRAS? (4 points)

Answer 23

• Stock of capital inputs affected by the level of gross capital investment
• efficiency of allocation of factor inputs
• Technological advances
• improvements in quality of factor inputs/productivity of inputs

seti

Question 24

Key factors effecting LRAS? (4 points)

Answer 24

capital investments

Higher productivity of labour and capital

increases labour market participation

gains from innovation and enterprise

chig

Question 25

Productivity

Answer 25

Measures efficiency of the productive process

Factor inputs + factor productivity = Output

Question 26

Fiscal balance

Answer 26

Difference between government income from taxation and its expenditure

Question 27

What things lead to UK’S current low productivity?

Answer 27

inadequate skills of workers

companies lost momentum after financial crash

Question 28

inflation

Answer 28

a sustained increase in the price level.

Question 29

When spare capacity is high, SRAS will be…

Answer 29

Elastic

Question 30

As output increases, what happens to elasticity of SRAS?

Answer 30

less elastic/more inelastic as it reaches full employment and amount of spare capacity decreases

Question 31

Output gap

Answer 31

Difference between actual level of GDP and estimated potential level of GDP

Question 32

Business cycle

Answer 32

Short run fluctuations of national output (real GDP) around its long term trend

Question 33

Demand pull inflation

Answer 33

inflation caused by AD increasing faster than AS

demand pull inflation means:

• Excess demand and ‘too much money chasing too few goods.’
• The economy is at full employment/full capacity.
• The economy will be growing at a rate faster than the long-run trend rate.
• A falling unemployment rate.

If aggregate demand is rising at 4%, but productive capacity is only rising at 2.5%; firms will see demand outstripping supply. Therefore, they respond by increasing prices.

(Also, as firms produce more, they employ more workers, creating a rise in employment and fall in unemployment. This increased demand for workers puts upward pressure on wages, leading to wage-push inflation. Higher wages increase disposable income of workers leading to a rise in consumer spending)

Question 34

Cost push inflation

Answer 34

• Rising wage costs in labour market
• increasing raw materials and component costs from domestic and overseas suppliers
• rising import prices due to failing exchange rate

Question 35

Administered prices

Answer 35

changes in regulated prices eg water bills
changes in indirect taxes and subsidies
changes in environmental taxes

Question 36

Rising inflation can lead to an increase in…

Answer 36

inflation expectations, then feed through to higher wages claims and rising costs

Question 37

when there is any increases in demand ineleasticaly, the general price level…

Answer 37

becomes inflationary

Question 38

Factors effecting inflationary pressures
Rising property prices-->
Depreciating exchange rate-->
increasing world oil prices-->
rapid expansion of money and credit from banks-->

Answer 38

Factors effecting inflationary pressures
Rising property prices–> Increased consumer wealth so cost push

Depreciating exchange rate–>increases import price + rising exports demand pull or cost push

increasing world oil prices–> Higher costs to business so cost push

rapid expansion of money and credit from banks–> rising consumer spending financed by loans so demand pull inflationary risk

Question 39

why cost push infaltion

Answer 39

so firms protect profit margins

Question 40

internal causes of inflation (4 points)

Answer 40

Large surge in property prices

high labour cost

boom in credit/money supply

rise in business taxes

Question 41

External causes of inflation

Answer 41

high inflation in other countries

increases in oil/gas prices

inflation in global commodity prices

depreciation of the exchange rate

hiid

Question 42

Why is high inflation an economic problem

Answer 42

Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate

Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real incomes.

Negative real interest rates: If interest rates on savings accounts are lower than the rate of inflation, then people who rely on interest from their savings will be poorer. Real interest rates for millions of savers in the UK and many other countries have been negative for at least four years

Cost of borrowing: High inflation may also lead to higher borrowing costs for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher.

Risks of wage inflation: High inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses

Business competitiveness:If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets. Eventually this may show through in reduced export orders, lower profits and fewer jobs, and also in a worsening of a country’s trade balance. A fall in exports can trigger negative multiplier and accelerator effects on national income and employment.

Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment spending.

Question 43

investment

Answer 43

Investment is spending on capital goods such as new factories, other buildings machinery, vehicles