Revision

Question 1

Definition of economic growth

Answer 1

An increase in actual or potential output of an economy

Question 2

Measure of economic growth

Answer 2

Real GDP and real GDP per capita - per person

Question 3

Causes of economic growth

Answer 3

– Increase Government spending for education
– Increase Immigration
– Increase Labour productivity
– Decrease i/r
– Decrease Exchange Rate
– Decrease income tax
– Decrease Price of raw material
– Decrease wages
– Decrease VAT

Question 4

Positive output gap

Answer 4

Actual output is bigger than potential output

Question 5

Negative output gap

Answer 5

The actual output is smaller than the trend output

Question 6

Causes of the economic cycle

Answer 6

1, Speculative bubbles

2. Changes in inventory - stocks of finished products
3. Political cycle
4. Outside shocks - unexpected
5. Multiplier / accelerator interaction

Question 7

Speculative bubbles

Answer 7

When people realise the value of their assets is above their true value they sell them

Question 8

Changes in inventory - stocks of finished products

Answer 8

Firms hold stocks of raw materials and finished goods in order to smooth production with changes in demand

Question 9

Political cycle

Answer 9

Once elected, they may try to deflate AD to avoid inflation and the economy over-heating

Question 10

Outside shocks

Answer 10

Unexpected, significant - Natural disaster affecting crops, change in price of oil

Question 11

Multiplier / Accelerator interaction

Answer 11

A change in one of the components of AD leads to a greater overall change in national income

Question 12

Benefits of economic growth

Answer 12

1. Increase output -> Decrease unemployment -> Increase Yd -> people can buy more -> Increase living standards
2. Increase output -> Decrease unemployment -> Decrease Government spending on unemployment benefits -> Increase Tax revenue -> Government Budget improves
3. Increase International status and power in organisations

Question 13

Costs of economic growth

Answer 13

1. Increase inflation -> decrease Living standards
2. Environmental damage
3. Could lead to unemployment if growth is caused by an increase in use of technologies

Question 14

Unemployment definition

Answer 14

Everyone who is willing and able to work but cannot find a job

Question 15

Measures of unemployment

Answer 15

1. Labour force survey (LFS)

2. Claimant count

Question 16

Types of unemployment

Answer 16

1. Structural unemployment - inexperienced
2. Cyclical unemployment - unemployed consumption can’t pay wages
3. Seasonal - Ski
4. Frictional unemployment

Question 17

Costs of unemployment

Answer 17

1. Decrease Standart of living
2. Stress/mental health
3. Decrease hygiene increase Fast Food
4. Difficulties saving for pension
5. Lower AD could lead to recession
6. Loss of tax revenue
7. Increase in crime

Question 18

Benefits of unemployment

Answer 18

1. Less pressure on wage claims

2. Increased selection - Bigger pool of labour

Question 19

Definition of inflation

Answer 19

Inflation is a sustained rise in the general price level

Question 20

Definition of disinflation

Answer 20

Disinflation is inflation with a lower rate

Question 21

UK inflation target

Answer 21

2% ± 1%

Question 22

Measures of unemployment

Answer 22

The Consumer Price Index (CPI). 700 Items are measured in price and weighted differently dependent on how important they are. Every month the CPI is checked.

Question 23

Quantity theory of money / Fisher equation

Answer 23

MV = PQ

V and Q are assumed to be constant. This means money supply has a direct impact on Price level.

Question 24

Definition of deflation

Answer 24

Deflation is a persistent fall in the general price level

Question 25

Types of deflation

Answer 25

1. Malevolent deflation (Bad) | 2. Benign deflation (Good)

Question 26

Malevolent deflation

Answer 26

1. Falling prices resulting from a significant downturn in economic activity – This causes a collapse of AD, resulting in a fall in output and a rise in unemployment

Question 27

Benign deflation

Answer 27

– Falling prices from technological advances and improved productivity – This improves the economy's supply-side, causing the SRAS and LRAS to increase – The price level falls but the output and employment rise

Question 28

Costs of inflation

Answer 28

– Erodes the value of money -> consumers can now afford to buy fewer goods and services -> Standart of living decreases – There is a loss of international competitiveness -> decrease in exports -> decrease in AD and economic growth -> increase unemployment

Question 29

Benefits of inflation

Answer 29

– Low and stable demand-pull inflation -> may encourage firms to increase their output as there is demand for their products -> increase overall capacity of the economy – Workers like increasing in their pay -> even if it is matted by inflation so that their real wages remains unchanged – Inflation allows firms to reduce real wages -> this can help the efficiency of the labour market

Question 30

Costs of deflation

Answer 30

– Consumer may postpone purchases which could decrease AD and because of the negative multiplier effect, this could lead to a recession – Deflation is often associated with a weak economy – Deflation increases the real value of savings – Negative impact on debtors like houseowners

Question 31

Benefits of deflation

Answer 31

– Increase in Standart of living – Increase in international competitiveness – Increase potential economic growth

Question 32

Balance of payment definition

Answer 32

A record of the financial flows between a country and the rest of the world

Question 33

3 accounts BoP

Answer 33

1. Current account 2. Capital account 3. Financial account

Question 34

Definition of current account surplus

Answer 34

Trade in goods + Trade in services + Primary income + Secondary income > 0

Question 35

Definition of current account surplus

Answer 35

Trade in goods + Trade in services + Primary income + Secondary income < 0

Question 36

Factors affecting the current account

Answer 36

1. Productivity 2. Relative inflation rate 3. Exchange rate 4. Economic conditions in other countries

Question 37

Examples of policy objectives conflicts

Answer 37

1. Economic growth –– Current account worsens (Bad for BoP) 2. Economic growth –– increase inequality 3. Economic growth –– Demand-pull inflation 4. Economic growth –– Can cause an increase in structural unemployment

Question 38

Definition Monetary Policy

Answer 38

The use of interest rates, the money supply and the exchange rate to try to achieve the government’s objectives.

Question 39

Aim of Monetary policy

Answer 39

Monetary Policy is a demand-side policy as it aims to influence AD

Question 40

Inflation target

Answer 40

The government states that inflation target 2%+- 1% and the BoE has to achieve it