Theme 2: The UK economy – performance and policies Flashcards

Question

What is **demand pull inflation**

Answer 1

caused by an **unsustainable rate of increase in aggregate demand** (AD) leading to a **positive output gap** (actual GDP\> potential) when the economy is close to full capacity

Answer 2

there being too much money in the economy. If people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise.

Answer 3

* **Less to spend** = fall in living standards * Those in debt will be able to pay it off cheaper, but inverse for those who are owed. Consumers who have saved will see their money is worth less * **Psychological effects** on consumers of price rising

Answer 4

* If inflation in Britain is higher than other countries, British goods will be **more expensive** and **less competitive** * Have to calculate new prices

Answer 5

* If government fails to change excise taxes in line with inflation then **government real revenue will fall** * However, if they fail to change personal income tax allowances (the amount a worker can earn tax free) then real government income will increase and taxpayers will have less money

Answer 6

* If workers do not recieve **yearly pay rises of inflation**

Answer 7

**indecation** - wages increased in line with predicted inflation however this can make it difficult to control inflation by the government

Answer 8

* **Deep fall in AD** causing a persistent recession / depression * Large **negative output gap** – i.e. high level of spare capacity

Answer 9

* **Improved productivity** * Technological advances * **Significant fall** in wage rates * **High exchange rate** causing import prices to fall

Answer 10

* **Holding back on consumer spending** * **real value of debt rises** with deflation * **The real cost of borrowing increases**: **Real interest rates** will rise if nominal rates of interest do not fall in line with prices. * **Lower profit margin** so reduced revenue * Deflation can make **exporters more competitive**

Answer 11

**Low interest rates and quantitative easing** * **Other measures to stimulate aggregate demand** * Attempts to lower the value of the exchange rate (perhaps via central bank intervention to sell their currency in the market) * Higher taxes on savings to encourage consumption

Answer 12

1. **Claimant count** 2. the International Labour Organisation (ILO) and the UK Labour Force Survey

Answer 13

**number of people receiving benefits for being unemployed** provided on a monthly basis

Answer 14

sample of people living in households and asking questions about personal circumstances to class people as **employed**, **unemployed**, or **inactive** according to the ILO definitions

Answer 15

* some people arent elligble for benefits but are classed as unemplyoed so **LFS is typically higher** * both seen as underestimating as they don't recognise the **hidden unemployed**

Answer 16

* working part time but would like to work full time * on government training schemes who would prefer employment * classed as sick or disabled * who aren’t actively looking for jobs but would take a job if offered or are in education because they can’t get a job

Answer 17

**employment rate** is the percentage of the population of working age who are employed, and the **unemployment rate** is the percentage of the economically active who are unemployed.

Answer 18

**activity/participation rate** is the percentage of the population of working age who are economically active whilst the **inactivity** rate is percentage of the population of working age who are inactive

Answer 19

* underemployed are those who are in **part time or zero hour contract**s when they would prefer to be full time and people who are self-employed but would rather be employees. * It also includes those who are in jobs which **do not reflect their skill level**

Answer 20

● Increases in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country . There will be a lower GDP and lower tax revenues as less people are working. ● However, decreases in inactivity could just result in more people being unemployed if there are no jobs available to them.

Answer 21

* People **moving between jobs** * Isn't serious and mostly short term

Answer 22

* Employment that is **strongly seasonal** in demand, requiring large numbers of people at specific times * **Little can be done** to prevent this in a free market economy *

Answer 23

* Unemployment due to a **general lack of demand**, also known as a **Keynesian ‘demand deficient’ unemploymenyt** * Falls in demand, lowers profits and forces business to cut unemployment in order to control costs

Answer 24

* Unemployment due to **real wages being above their market clearing level** which creates an excess supply of labour * Caused by **minimum wages** and unemplyed workers refusing to take low paid jobs because of **welfare benefits**

Answer 25

a mismatch of skills between the unemployed and available jobs

Answer 26

* **Decline of manufacturing**....loss of skilled jobs (e.g. car industry in Birmingham) * **Occupational immobility**...people with a lifetime of skills in the shipbuilding industry would find it difficult learning computer skills. * **Geographical immobility**....people may be unable to move due to housing costs or unwilling due to family ties. * **Long term regional decline**...certain parts of Britain have experienced decline (e.g. South Wales) * **Foreign competition** – rising imports * **Outsourcing of production overseas**...relocation of the textile industry from Yorkshire to the Far East.

Answer 27

* **Regional unemployment** is where certain areas of a country suffer from very low levels of employment due to industry closures * **Sectoral unemploymen**t is where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment. * **Technological unemployment** is where an improvement in technology means that jobs are replaced.

Answer 28

* **Loss of work experience** * **Loss of current/future income** * changing pattern of jobs in the economy

Answer 29

1. **Infastructure** investment projects 2. Financial support for **apprenticeships** 1. **Entreprise policies** to life the rate of new business start ups

Answer 30

* Funding apprenticeships and training programmes * improving interregional links

Answer 31

* Rise in house-building will help to keep property prices lower and encourage more affordable rents * Active regional policy to create new jobs and businesses * enterprise zones

Answer 32

● There will tend to be a decrease in demand for their goods (but this depends on the YED) and so this could lead to a **fall in profit.** ● Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have **a smaller pool of skilled people to employ.** ● They can **offer low wages** as people will take the job anyway because they know there is a lack of jobs so have few options.

Answer 33

● Consumers suffer from **less choice**. The quality of goods may also decrease. ● The unemployed consumers lose out as they have less available to spend. ● However, firms may lower prices and put on **sales** in order to increase demand for their product.

Answer 34

● The reduced income results in a **fall in tax revenues** and **higher spending** on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere. ● This will result in an increase in the **budget deficit**. It will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education. They may need to increase borrowing.

Answer 35

● Rising unemployment is linked to **social deprivation**. There is a relationship with crime and social dislocation ● It results in a **loss of potential national output** and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS .● Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime.

Answer 36

● Rising unemployment is linked to **social deprivation**. There is a relationship with crime and social dislocation ● It results in a **loss of potential national output** and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS .● Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime.

Answer 37

* Leads to **increased jobs** due to a **circular flow of income** * Also leads to **lower wages** due to **higher competition**; people with low motivation and low skill are most affected * Fill in shortages where skilled labour is needed

Answer 38

1. Current Account 2. Financial Account 3. Capital Account 4. Balancing Item

Answer 39

1. Balance of trade in **goods** 2. Balance of trade in **services** 3. Net **primary income** (interest, profits, dividends and migrant remittances) 4. Net **secondary income** (transfers i.e. contributions to EU, military aid, overseas aid)

Answer 40

* Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts (example would be international buying and selling of land by businesses) * Debt forgiveness/cancellation (forgiving debt counted as a negative) * Capital transfers of ownership of fixed assets (i.e. international death duties)

Answer 41

- includes transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents * Net balance of **foreign direct investment flows** (FDI) * Net balance of **portfolio investment flows** (e.g. inflows/outflows of debt and equity) * Balance of **banking flows** (e.g. hot money flowing in/out of banking system) * Changes to the value of **reserves of gold and foreign currency**

Answer 42

it gets rid of estimated errors and omissions to get the **BOP=0**

Answer 43

1. demand = **supply for currency** 2. **BOP=0**

Answer 44

* If there is a deficit on the current account there will be a surplus on the financial account If there was an increase in interest rates this would cause hot money flows to enter the UK

Answer 45

* Poor price and non-price competitiveness * Strong exchange rate affecting demand for exports and imports 1. High currency value increases prices of exports 2. Appreciating currency also makes imports cheaper * Recession in one or more major trade partner countries * Volatile global prices (e.g. soft and hard commodities)

Answer 46

* Loss of aggregate demand if there is a trade deficit (M\>X) which causes weaker real GDP * cause the currency to depreciate * a loss of investor confidence, leading to capital flight * **Need to cut spending in the future**. For example, during 2012-16, many countries in the Eurozone sought to reduce their budget deficit to comply with EU rules. * **Opportunity cost of debt interest payments**. * **Potential rise in bond yields**. may struggle to attract sufficient investors to buy bonds. If this happens, bond yields will rise causing the deficit to be more expensive to finance.

Answer 47

1. If financed by long-term capital inflows, it can increase the productive capacity 2. In globalisation, it is easy to attract sufficient capital flows 3. If defecit gets too large it will cause a **devaluation** which helps reduce the defecit 4. Provides an outlet for domestic demand and prevent inflation

Answer 48

The financing of a deficit is achieved by: 1. Selling reserves ( gold/ forex ) 2. Borrowing 3. FDI 4. Hot Money Flows

Answer 49

* A large and persistent surplus of savings (S) over investment (I) for households, firms and the government. * A large gap between exports (X) and imports (M), when net income balance and net transfers are small * An export surplus may be the result of very high prices for exports of commodities such as oil and gas.

Answer 50

* A surplus on the current account would allow a deficit to be run on the capital account e.g. surplus foreign currency can be used to fund investment in assets located overseas * Current account surplus countries nearly always have **fairly strong exchange rates** as a result

Answer 51

Total level of planned real expenditure on the goods and services produced within a country

Answer 52

AD = C + I + G + (X-M)

Answer 53

1. The Wealth Effect 2. The Interest-Rate Effect 3. The Exchange Rate Effect 4. Real Balance Effect

Answer 54

Price Level falls --> purchasing power increases --> higher consumption --> higher AD

Answer 55

Price Level falls --> More disposable income --> rise in loanable funds supply --> fall in interest rates --> lower cost of borrowing --> more investment in economy (price of loanable funds is the real IR)

Answer 56

fall in price level --> domestic goods cheaper --> more exports and less imports --> (X-M) increases so AD increases

Answer 57

Rise in prices --> savings have less value --> savings offer less security --> People will want to save more --> Fall in consumption so fall in AD

Answer 58

* Movement along the AD is caused by a change in prices (inflation/deflation) * A shift of the AD is caused by any other variable independent of the price level

Answer 59

how much an increase in income affect consumption

Answer 60

Poor tend to have a higher MPC

Answer 61

* Savings is what is not spent out of income * An increase is consumption decreases savings

Answer 62

1. Interest Rates 2. Consumer Confidence 3. Wealth Effects 4. Distribution of Income 5. Tastes and attitudes

Answer 63

* Major expenditures are bought on credit * Interest rates affect the cost of credit * High IR increase mortgage repayments * Also decreases value of shares; as the MES compared to Treasury is smaller

Answer 64

* Confidence in the future increases spending. * Lack of confidence increases savings * Consumers might also expect higher prices and rush stores or factor in higher taxation (Ricardian Equivalence)

Answer 65

consumers anticipate the future so if they receive a tax cut financed by government borrowing they anticipate future taxes will rise. Therefore, their lifetime income remains unchanged and so consumer spending remains unchanged.

Answer 66

1. Consumers **are not rational** 2. Consumers do spend at least some of the tax cuts 3. Tax cuts can boost growth and diminish borrowing requirements for governments 4. Multiplier Effect

Answer 67

1. Consumers **are not rational** 2. Consumers do spend at least some of the tax cuts 3. Tax cuts can boost growth and diminish borrowing requirements for governments 4. Multiplier Effect

Answer 68

Greater wealth improves a consumer's confidence and thus leads to greater spending e.g. a higher house prices means a consumer can borrow more on the house. higher share prices mean some can be sold

Answer 69

If money is moved from the rich to the poor, consumption is likely to increase as the poor have a higher MPC.

Answer 70

a strong materialistic drive that encourages people to have the newest and the best and therefore spending can be very high, in some cases even above income. If people were less materialistic, consumption would decrease.

Answer 71

the addition of **capital stock** to the economy

Answer 72

Gross Investment - amount of investment carried out and ignores the level of depreciation Net Investment - Gross Investment minus the value of the depreciation ## Footnote `

Answer 73

1. Rate of economic growth 2. Business expectations and confidence 3. Interest Rates 4. Access to Credit 5. Retained profit 6. Technological Change

Answer 74

* A growing economy spurs on confidence hence investment

Answer 75

Confidence

Answer 76

Confidence makes Buisnesses want to preapre for the future

Answer 77

* High IR increase the cost of borrowing * Therefore the marginal efficiency of capital needs to be more attractive

Answer 78

displays the expected rate of return from an investment at a particular given time. If interest rate is at 10% then firms need an expected rate of return which is at least equal to 10% to make it worthwhile.

Answer 79

* High Risk investments mean less access to credit * Recessions can make credit harder to acces with a risk awareness premium

Answer 80

* Higher retained profit makes investment more attractive due to the opportunity cost of keeping it

Answer 81

1. **Time Lags** If a firm has started a project a rise in IR is unlikley to change the decisions but can impact future projects and decisions 2. **Magnitude of Other Factors** IR can be outweighed by economic conditions e.g. 2009 IR 5% --> 0.5% but investment still fell because of the deep recession and unwillingnes to lend (liquidity trap)

Answer 82

Suggests that capital investment is a function of output An increase in demand and output, investment will rise to meet the expected demand

Answer 83

1. The Trade Cycle 2. Fiscal Policy 3. Age distribution of the population

Answer 84

* Decisions made to manage AD and thus regulate trade cycle * Automatic stabilisers cause Government spending to rise in recession

Answer 85

An automatic way to blunt off the worst extremes in the economic cycles and buy time for discretionary government policy

Answer 86

1. **Welfare Benefits** In Recession Government spending automatically increases through transfer payments, this increases AD 2. **Progressive Income Tax** in a Boom, Higher incomes makes workers be pushed into another tax band so tax regulates AD

Answer 87

* Level of government spending is dependent on what is laid out in the fiscal policy

Answer 88

* An ageing population leads to increased government expenditure on pensions, social care * A young population leades to an increased spending on education

Answer 89

a process where an increase in government spending leads to a fall in private sector spending.

Answer 90

If the government increases it's spending – say through selling bonds – The demand for money will increase, which, ceteris paribus, raises interest rates. At higher interest rates, both consumer spending and investment spending are likely to fall. The aggregate effect on the economy is that financial resources are diverted from private firms to be used by the public sector.

Answer 91

Initially, via a multiplier effect, national income increases, but as a result of the government selling securities in the financial markets, the **demand for scarce loanable funds increases.** This **drives up interest rates**, which causes a contraction in the demand by the private sector for investment goods (capital) as well as reducing the demand for consumer goods. This, in turn, leads to a fall in GDP.

Answer 92

a relative increase in the public sector may push up wages in order to attract workers from the private sector. The increased demand for labour reduces unemployment and ‘tightens’ the labour market, leading to possible shortages of labour available for the private sector use as well causing upward pressure on wage levels across the economy.

Answer 93

that financial and real resources are ultimately scarce, and if one sector of the economy increases its use of these resources, fewer are available for use in other sectors.

Answer 94

This means that attempts to stimulate an economy by increasing debt-financed government spending will not be effective because investors and consumers understand that the debt will eventually have to be paid for in the form of future taxes. The theory argues that **people will save based on their expectation of** **increased future taxes** to be levied in order to pay off the debt, and that this will **offset the increase in aggregate demand** from the increased government spending.

Answer 95

an increase in government spending will lead individuals and organisations to **expect interest rates to rise** in the future, they will save more in order to pay higher interest rates.

Answer 96

it may be a weak effect, this depends on the various elasticities that exist in the relevant markets. if the supply of loanable funds is elastic and the demand for capital is inelastic, the impact of higher interest will be relatively small.

Answer 97

Government spending leads to an increase in private spending; a ‘crowding in’ effect

Answer 98

1. Frontier technology projects have **extremely high fixed** costs so by letting the public sector fund the research, it allows the private sector to realise higher profits. 2. **“Spillover effects”**, where new technologies find different applications in the private sector. GPS, for instance, was first developed to help missiles find their targets 3. **Credit constraints on the private sector**, where a project is difficult to fund without government support due to, say, an economic downturn.

Answer 99

the potential outcomes from speculative research and development are inherently unknowable, which makes a new project impossible to justify commercially.

Answer 100

Total exports - total imports

Answer 101

1. Real Income 2. Exchange Rates 3. State of the World Economy 4. Degree of Protectionism 5. Non-Price Factors 6. Prices

Answer 102

* Imports are YED positive so net trade decreases

Answer 103

* A strong pound makes imports cheaper and exports more expensive * However this is dependent on elasticity; if both import and exportts are elastic then there will be fall in net trade

Answer 104

If the Uk's main export country is doing well then UK exports will rise and so will the net trade balance

Answer 105

If there is high protectionism on UK exports in other countries, exports will decrease as it will be harder for UK firms to sell their goods in other countries. If there is high protectionism on imports into the UK, imports will decrease but other countries are likely to retaliate and therefore exports are likely to decrease. Free trade means that net trade will be a more significant part of AD, whether this be in a positive or negative sense.

Answer 106

If there is high protectionism on UK exports in other countries, exports will decrease as it will be harder for UK firms to sell their goods in other countries. If there is high protectionism on imports into the UK, imports will decrease but other countries are likely to retaliate and therefore exports are likely to decrease. Free trade means that net trade will be a more significant part of AD, whether this be in a positive or negative sense.

Answer 107

higher quality and design, exports will be high as foreign demand for UK goods will increase and imports will decrease as people will buy the British goods instead of foreign goods so net trade will increase. If UK goods are well marketed, people will have a stronger desire to buy British goods so exports will increase and imports will decrease, so net trade will increase. Strong quality/design and marketing will mean that British exports are likely to be more inelastic.

Answer 108

higher quality and design, exports will be high as foreign demand for UK goods will increase and imports will decrease as people will buy the British goods instead of foreign goods so net trade will increase. If UK goods are well marketed, people will have a stronger desire to buy British goods so exports will increase and imports will decrease, so net trade will increase. Strong quality/design and marketing will mean that British exports are likely to be more inelastic.

Answer 109

* High prices of UK goods will mean that the goods are less competitive compared to international goods since people make decisions partly based on price. * Prices are affected by the inflation rate: if the UK inflation rate is higher than other countries, prices will rise faster * The effects of changing prices on the value of imports and exports depends on the price elasticity of demand. If PED is elastic, then higher prices will lead to a fall in net trade

Answer 110

the volume of goods and services produced within the economy at a given price level. the costs of production

Answer 111

Firms are willing to supply more at a higher price

Answer 112

likely to be elastic as an increase in output by firms is likely to lead to an increase in costs which leads to a rise in prices as they pass these costs onto consumers.

Answer 113

money wage rates, factor prices and the state of technology are fixed and can’t change; a change in these results in a shift of the curve.

Answer 114

1. Changes in costs of raw materials and energy 2. Changes in exchange rates 3. Changes in tax rates

Answer 115

AS is independent of price level and instead determined by the potential production

Answer 116

Markets tend to correct themselves fairly quickly and move back to the LRAS

Answer 117

- In the short run it is possible for an economy to exceed the maximum potential LRAS by allowing factors of production to work overtime or not allow time for maintenance of machinery etc.

Answer 118

It is vertical as with the classical view; this is the PPF

Answer 119

If it stayed vertical it would imply that when unemployment exists, wages and price falls which makes it worthwhile to employ again and employment comes back But Keynes thought wages are **sticky downwards**

Answer 120

* union power * businesses are unwilling to risk demotivation * workers are unwilling to work for too low * the minimum wage means wages cannot fall below a certain level

Answer 121

They do have to offer high wages to attract staff as the LRAS is **perfectly elastic** at this point

Answer 122

Labour becomes scarcer so firms have to offer higher wages These higher wages lead to a higher average price level. Output becomes more price inelastic until it reaches point B, where an increase in prices no longer affects output as the PPF has been reached.

Answer 123

1. Technological Advance 2. Changes in relative productivity 3. Changes in education and skill 4. Changes in Government Regulation 5. Demographic Changes and migration 6. Competition Policy

Answer 124

* More machines means more goods can be produced or more efficiectly * Increasing the LRAS

Answer 125

* Higher productivity increases the production possibility * if the UK is more productive than other countries it will encourage production of that good in the UK, so investment will be increased, and this will increase LRAS

Answer 126

* A more skilled workforce will be more efficient which will shift the LRAS * Education can reduce occupational immobility which decreases structural immobility so resources are used efficiently

Answer 127

1. **Increase the size of the workforce** by encouraging people to get back in (benefits and working age reduced) 2.**Increase research and development** ; offer tax breaks to fund 3.**Increase incentives to set up businesses**; entrepreneurial zones and lower coporation tax

Answer 128

* The more migration the higher the LRAS * The more of that migration is working age the better

Answer 129

* Competition pushes buisness to both improve efficiency and quality of their products so LRAS will increase * Less competition however can encourage investment and innovation (copyright laws and patents)

Answer 130

Wealth is a stock of assets whilst income is a flow Countries with high levels of wealth tend to have high levels of income and vice versa but there is not a perfect correlation between wealth and income.

Answer 131

An increase in quality or quantity of one of the four factors of production land, labour, capital or enterprise

Answer 132

* An increase in LRAS will increase the productive capacity of the economy along with economic growth

Answer 133

The discovery of new resources e.g. oil will increase economic growth. most potent effect in developing countries eval: Dutch Disease

Answer 134

the problems associated with a rapid increase in the production of raw materials (like oil and gas) causing a decline in other sectors of the economy. When the raw materials run out, the economy can be in a worse position than before.

Answer 135

1. **Appreciation in currency. ** 2. **Decline in competitiveness**. The problem of this appreciation in the exchange rate is that other trade-able sectors of the economy will become uncompetitive. 3. **Growth in luxury imports. ** 4. **Growth in real wages**. causing another problem for manufacturing firms as they have to increase real wages to retain workers. This will further decrease the competitiveness of manufacturing exports. 5. **Indirect-deindustrialisation.** 5. Income inequality. 6. Tax revenue. the government will often cut other taxes and come to rely on oil tax revenues.

Answer 136

A change in the age profile of the population i.e. the amount of people of working age will affect economic growth: the more people of working age there are, the more growth there will be.

Answer 137

* Raise the retirement age * Provide free childcare * Encourage immigration

Answer 138

* Education makes workers more efficient * Less likely to suffer structural unemployment so reduce NRU and increase LRAS

Answer 139

* Sustained investment allows access to new techhnology to improve productivity * More machines --> more goods

Answer 140

If the government offers tax benefits and grants, they will encourage the development of business, creating jobs and meaning more goods and services are produced, which will increase economic growth

Answer 141

If there is too much wealth distribution (i.e. too high taxes and benefits), there will be little incentive to work hard as the rich know a lot of their money will be taken away and the poor know that there is no need to work as benefits will give them just as much money as a job on minimum wage. This lack of incentive will mean that businesses won’t invest and so there will be little to no economic growth.

Answer 142

actual growth is the percentage change in GDP

Answer 143

Potential growth is the **change in productive potential** of the economy over time, so the LRAS or PPF curve shifts.

Answer 144

Potential growth is the **change in productive potential** of the economy over time, so the LRAS or PPF curve shifts.

Answer 145

Intially increased exports affect AD but sustained high ecports force investment and increased demand for labour

Answer 146

1. Injection into Circular Flow causes rise in AD 2. Growing GDP causes accelerator effect 3. Compplementary industries benefit; Rotterdam in Netherlands

Answer 147

* Overdepndence on trading partner * Production capacity allocated to supply goods and services for export cannot be put to use meeting domestic needs and wants. * Export-led growth might be unsustainable if it contributes extraction of natural resources beyond what is required for long-term balanced growth to be maintained.

Answer 148

average sustainable rate of economic growth over a period of time. It is what tends to happen over a long period of time

Answer 149

An output gap is the **difference between the actual level of GDP and the estimated long-term value for GDP**

Answer 150

Actual GDP> long run trend rate

Answer 151

Long run trend rate> Actual GDP

Answer 152

* Position of LRAS is unkown and intial estimates of GDP are often inaccurate

Answer 153

In the diagram, there is an equilibrium where AD=SRAS=LRAS. However, at AD1 , there is a negative output gap because the SRAS equilibrium is less than the LRAS equilibrium, so the full capacity of the economy is not being met. At AD2 , there is a positive output gap as SRAS is higher than LRAS.

Answer 154

Classical economists would argue that this positive output gap would be filled by long-run economic growth moving the LRAS curve, a recession which would decrease AD or a rise in the costs of production which would decrease SRAS. They would also argue that the negative output gap would be brought back to equilibrium by rising AD or a fall in SRAS due to lower costs of production.

Answer 155

The economy returns to Yf (full employment/equilibrium) following a period of deflation. There was no need to intervene justifying a laissez faire approach.

Answer 156

Keynes argued in a recession, people responded to the threat of unemployment by increasing saving and reducing their spending. This was a rational choice, but it contributes to an even bigger decline in AD and GDP. This is why government intervention may be needed. (Defies Says Law)

Answer 157

High savings ratio in 2008 contributed to recession

Answer 158

1. Higher saving increases bank balances and can lead to an **increase in bank lending - and hence investment.** (Banks may be unwilling to lead) 2. A fall in demand from higher saving, will cause lower prices, which encourage demand to increase. This is related to Say's Law which states supply creates its own demand. 3. Higher domestic savings can lead to lower domestic inflation and therefore increase exports. Higher exports can boost demand.

Answer 159

the production of goods creates its own demand. production creates wages for workers and income for the businessman. Therefore, the production has increased wealth and leads to demand for other goods.

Answer 160

* The economy should always be close to full employment. There **shouldn’t be demand deficient unemployment.** * Economic downturns are not due to a ‘glut of supply’ * According to classical economists, any unemployment must be due to **wages being artificially kept above the equilibrium level **or structural factors, such as lack of skills in specific industries. * To increase output, we should **concentrate on increasing production** rather than demand.

Answer 161

* 1930 mass ue shows there can be insufficient aggregate demand for goods produced. * Wages are **sticky downwards** * **Paradox of Thrift **: Say himself criticised Ricardo for neglecting the possibility of hoarding if there are insufficient investment opportunities. Lack of confidence * Liquidity Trap. In a liquidity trap, the demand to hold cash is greater than the demand to spend. Banks increase their reserves and the saving rate increases, this leads to a fall in aggregate demand. * It may be **very rational to ‘hoard’ money** – especially in a period of deflation or anxiety. * The balance sheet recession of 2008-12, illustrated an example of where **banks, consumers and firms were keen to pay off their debts and not spend all their income**. This led to a prolonged recession

Answer 162

· R.GDP is now above trend and this can occur because with the rising demand firms will offer overtime/stay open longer etc. · However this puts upward pressure on the price level (demand pull) and cost push. WHY? · The SRAS curve now shifts in as COP rises. (please draw SRAS2) · The economy returns to YFE but now at a higher price level (inflation) There may be an increase in inflationary expectations also (why?)

Answer 163

Fiscal Policy + Multiplier can lead to demand push inflation

Answer 164

periodic but irregular up and down movements in economic activity boom --> downturn --> recession (slump) --> recovery

Answer 165

two main types of trade cycle: a mild trade cycle where GDP does not fall during recessions but instead doesn’t grow by as much as the trend, and a more extreme one

Answer 166

* High national income * Economy working above PPF (Positive Output Gap) * Increase imports to meet demad * Inflationary pressure

Answer 167

* High national income * Economy working above PPF (Positive Output Gap) * Increase imports to meet demad * Inflationary pressure

Answer 168

* Output and income fall --> fall in C and I and tax rev. * Payments for benefits increase * Accept lower wages due to high unemployment --> fall in inflation + imports

Answer 169

* **High unemployment** * Causes low C,I,M * Inflationary pressure will be low, may be deflation * GDP -ve for 2 quarters

Answer 170

* National income and output begin to increase with unemployment falling * C,I,M increasing * Inflationary pressure grows

Answer 171

Economies do not bounce back to their previous level of growth e.g. some may take retirement, some lose their skills or become discouraged causing a **loss in physical and human capital discouraging investment**

Answer 172

In the period 8 to 13 February 2022, based on adults aged 50 to 70 years in Great Britain (GB) who have left or lost their job since the start of the coronavirus (COVID-19) pandemic and not returned to work: The majority (77%) of adults aged 50 to 59 years said they left their previous job sooner than expected compared with 57% of adults aged 60 years and over

Answer 173

* There will be an **increase in demand for housing** as people have more money and so are able to afford to buy properties, which will increase house prices. * **Shares to increase in value** and lead to positive wealth effect. * Improved productive efficiency due to better technology could lead to **lower prices or higher quality goods. **

Answer 174

* Growth in Inequality * Growth in inflation

Answer 175

* **Investment will increase** since businesses are more successful. *** Business confidence will improve** so higher I * increased investment means technology will improve which is likely to increase productive efficiency and **lead to lower costs**. * The combination of higher demand and lower costs is likely to lead to **higher profits**. * Economic growth also provides the opportunity for new firms to establish themselves and allows existing ones to make more profit.

Answer 176

* **Investment will increase** since businesses are more successful. *** Business confidence will improve** so higher I * increased investment means technology will improve which is likely to increase productive efficiency and lead to lower costs. * The combination of higher demand and lower costs is likely to lead to higher profits. * Economic growth also provides the opportunity for new firms to establish themselves and allows existing ones to make more profit. * Easier to access finance due to lower IR and higher confidence

Answer 177

* Firms who sell **inferior goods** may lose out * Changing technology may cause **markets to disappear/greater automation**

Answer 178

* Economic growth will result in **lower poverty levels** . * Increase in supply --> increased jobs --> higher wages * There will be more goods and services, lowering prices and improvin access * **Housing standards and the quality of food increases** --> health increases * Increased government spending will lead to improved living standards * people with higher incomes are able to buy cleaner fuels and richer countries can devote resources for research and development of cleaner resources and ‘greener’, more efficient technology

Answer 179

* ** increased inequalities **between rich and poor; rich might even exploit poor for growth * **exploitation of the environment** A rise in income means more people have access to electricity etc. and use it more freely. This causes **depletion of non-renewable resources**, concern about sustainability of growth for future generations and increased levels of pollution/waste/congestion.

Answer 180

individuals could limit their use so that they don’t deplete the common resource. However, there is a free-rider problem. Where people rely on others to cut back their production. If everyone free-rides and maximises their use, then we get a situation of over-consumption.

Answer 181

* **Voluntary agreements** need sense of civic responsibility * **Government regulation** can limit fish catches or size of fishnets to allow young fish to escape. * Clearly defined **property rights** the private owner has a stronger incentive to manage the resource for optimum outcome. However, the problem of property rights

Answer 182

Officials determined that the population of midAtlantic bluefish was at an unhealthy level in the late 1990s. To recover this valuable fishery, federal managers implemented a nine-year rebuilding plan, which reached its goal a year ahead of schedule, leading officials to declare bluefish fully rebuilt in 2009.

Answer 183

1. **Economic Growth** - sustainable in the long-run 2. **Low Unemployment** - as low as possible, 3% only frictional 3. **Low and stable inflation** - 2% targetm 4. **Balance of Payments Equilibrium on the Current Account** - sustainablity of current account to finance deficits; avoid current account

Answer 184

1. **Balanced government budget**: This ensures the government keeps control of state borrowing, so the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to and makes repayments easier. 2. **Protection of the environment**: This aims to provide long run environmental stability. It ensures resources are used sustainability 3. **Greater income equality**: This minimises the gap between the rich and poor. It is generally associated with a fairer society.

Answer 185

* a high level of imported goods provides **consumers with a wider choice of goods, which may be of higher quality and lower prices** ○ All of this enhances consumers standards of living and welfare * Firms may also benefits from **cheaper or higher quality imported components** or raw materials, which may reduce costs, either enhancing profits or lowering prices further for customers * As a result, it is viewed by many economists that a deficit on the balance of trade overall, is not necessarily detrimental to the wider economy

Answer 186

Monetary policy is where the central bank or regulatory authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy.

Answer 187

**Fiscal policy** is use of borrowing, government spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance.

Answer 188

**increase the cost of borrowing** for firms and consumers It also makes **savings more attractive**, as the interest earnt on them will be higher fall in demand for assets such as stocks, shares and government bonds. This leads to a fall in prices for these assets (negative wealth effect) People will become **less confident about borrowing and spending** if interest rates rise. **value of the pound will rise** . This means that imports will be cheaper, and exports will be more expensive. This decreases net trade therefore AD.

Answer 189

* Such a significant fall that there is a BOP deficit * **Time lag** takes 1-2 years effect * Not all IR affected by repo rate * Liquidity trap e.g. 2008 * High IR over time encourage **discourage investment**

Answer 190

Bank of England buys assets in exchange for money in order to increase money supply and get money moving around the economy during times of very low demand. there is a rise in demand and so asset prices rise - positive wealth effect money supply increase; increased money supply will mean that the price of money falls; interest rates are the price of money Commercial banks may lower their interest rates

Answer 191

* Risky and could cause **hyperinflation**; 2020 QE --> 2022 inflation * no guarantee that higher asset prices lead into higher consumption through the wealth effect, especially if confidence remains low. * More expensive housing market, worsens inequality. It also led to rising share prices which increases inequality, since the rich grow richer whilst the poor see none of the gains.

Answer 192

* Spending impacts **LRAS** * Taxes and spending have an impact on **inequality** * May have an impact on debt and expectations * **Ricardian Equivalence** * Poor information. Fiscal policy will suffer if the government has poor information * Dependent on multiplier and confidence * Size * Conflicts with other objectives * Political influence

Answer 193

* Classical economist believe its just short-run disequilibrium, will return to LR equilibrium * Impact of changes on economy depend on where they are in Keynsian Economy * Significant time lag till full effect *

Answer 194

* Contractionay Fiscal Policy cut public sector wages and unemployment benefit by 10% and raised income tax from 22.5% to 25%; reduces AD * UK **forced to leave gold standard**, caused value of £ to fall by 25%, * There was recovery in London and the South East but Wales, the north and Scotland did not reach full employment until 1941.

Answer 195

Expansionary Keynsian fiscal policy response * New Deal which promised public sector investment, work schemes for the unemployed and fiscal stimulus. * The USA reached full employment in 1943

Answer 196

· Automatic stabilisers act in an **automatic way to blunt off the worst extremes** in the economic cycle. · Automatic stabilisers ‘buy time’ for discretionary government policy..

Answer 197

- Progressive Income Tax System - Welfare Benefits (U Benefits)

Answer 198

BOOM (Cushion Demand) - Higher Incomes --> Workers Pushed into higher tax bands --> Higher average rate of tax --> slow down increase in C - U low --> Gov. Spending on Benefits reduces Recession (support output) 1) Incomes Lower --> workers move into lower tax bands --> lower average rate of tax --> Prevents large decrease in C U High --> Gov. Spending on benefits increase

Answer 199

$1 of additional public funds for R&D translates into $5 of extra R&D funded by the private sector at the mean values of public and private R&D.

Answer 200

1. Frontier technology projects have extremely high fixed costs . 2. “Spillover effects”, where new technologies find different applications e.g. GPS was public sector 3. Credit constraints on the private sector, where a project is difficult to fund without government support due to, say, an economic downturn.

Answer 201

Occurs when the base rate falls so low that it no longer stimulates AD. Following the credit crunch banks became nervous/very cautious about lending and limited the availability of credit as they sought to recoup losses.

Answer 202

· Forward guidance is when the Central Bank announces to markets that it intends to keep interest rates at a certain level until a fixed point in the future. The aim of forward guidance is to influence long term interest rates and market expectations

Answer 203

· Commercial banks feel the cut in base rates is temporary, they may not want to cut their long term rates. · But, if the Central Bank confirms that it will keep base rates at 0.5% for a considerable time, then commercial banks may be more willing to reduce their long term rates because they know they will be able to borrow from the Central Bank at 0.5%. · The hope is that this will encourage banks to cut rates, and increase overall lending in the economy.

Answer 204

· There is nothing to stop the Central Bank ignoring its own pledge · Markets and banks know this and this could reduce the usefulness of the commitment, but it can still give an indication of how monetary policy will operate. Markets do tend to place a lot of weight on Central Bank pronouncements.

Answer 205

· Some economists suggest that a commitment to keep interest rates low for a long time, is an admission that the economy is deeply depressed and this could actually knock confidence and expectations Therefore, rather than boosting lending and economic activity, forward guidance could be seen as an act of desperation and therefore not help

Answer 206

· The funding for lending scheme was launched in July 2012 to try and encourage banks to lend directly to the real economy FLS works by Bank of England lends commercial banks funds at interest rates lower than market rates for an extended period. · If commercial banks expand their lending, they get lower interest rates. However, if they reduce their lending, they have to pay higher interest rates. · Because commercial banks find it cheaper and easier to borrow – this encourages them to lend to firms and consumers higher quantities and at lower interest rates.

Answer 207

Cash Reserve Ratio, it is the** percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank. ** When the central bank wants to increase money supply in the economy, it lowers the reserve ratio. As a result, commercial banks have higher funds to disburse as loans, thereby increasing the money supply in an economy

Answer 208

* limited in addressing cost push inflation domestically * limited supply-side effect * Liquiditty trap * Need more tools to control this many objectives * Exports less competitive * Time Lag- transmission mechanism

Answer 209

· Changes in indirect taxes can change the pattern of demand by varying relative prices (e.g. an increase in the real duty on petrol) · Indirect taxes can be used as a means of making the polluter pay and “internalizing the external costs” of production and consumption · Indirect taxes are less likely to distort choices between work and leisure and have less of a negative effect on work incentives. · Indirect taxes can be changed more easily than direct taxes – this gives policy-makers more flexibility. · Indirect taxes are less easy to avoid · Indirect taxes provide an incentive to save that help to provide finance for investment

Answer 210

· Many indirect taxes make the **distribution of income more unequal** because of their regressive effects · Higher indirect taxes can** cause cost-push inflation** which can lead to a rise in inflation expectations · If indirect taxes are too high – this creates an incentive to avoid taxes through “boot-legging” · Revenue from indirect taxes can be uncertain particularly when inflation is low or there is a recession causing a fall in consumer spending · There is a loss of welfare from duties e.g. loss of producer & consumer surplus · Higher indirect taxes affect households on lower incomes who are least able to save

Answer 211

increase incentive to work this is because the opportunity cost of not working increases. The voluntary UE may now seek employment meaning the labour supply increase shifting out the LRAS. · In addition those in work may now work harder as the potential rewards are greater.

Answer 212

· Given the state of current government finances, can it lower Y tax sufficiently to influence the voluntary Un to find employment. -*Liz Truss* · Will those in work harder or just enjoy a post-tax pay rise? - backward bending supply curve Have the voluntary Un actually got the skills to become employed without retraining?

Answer 213

This should create the incentive to invest. As well as influencing AD, the SRAS will be influenced through greater productivity and LRAS increases through increased productive capacity.

Answer 214

· By lowering corporation tax there is **no guarantee that firms will invest**. They may lack confidence * Firms may reward shareholders from the greater profits, benefitting AD (as long as the majority of shareholders reside domestically) but not influencing LRAS significantly. e.g. 18.7 billion water company profit, 18.1 billion dividend

Answer 215

· This increases the opportunity cost of not working, in theory incentivising the voluntary Un to find work. This increase in the labour supply means the NRU falls and the LRAS shifts out as productive capacity increases.

Answer 216

· Is this fair? Could this increase inequality and poverty of the most vulnerable in society · What about the skills gap? Individuals may want to work but are they employable. Is there sufficient demand in the economy? Child poverty?

Answer 217

Higher government spending on education and training, could increase long-term labour productivity and help the long-term trend rate of economic growth.

Answer 218

· But, also government spending could be inefficient and wasteful – it depends on what the government spends the extra spending on e.g. Apprenticeships 44% dropout rate * Time lag

Answer 219

· This is where tax bands do not rise in line with inflation. Inflation and earnings growth may push more taxpayers into higher tax brackets. Therefore fiscal drag has the effect of raising government tax revenue without explicitly raising tax rates. good example of an automatic stabiliser.

Answer 220

Borrowing should only be used to finance expenditure on infrastructure which will benefit the UK in the longer term, and is not to be used to finance current spending/debt, as taxes should cover current spending.

Answer 221

· The government needs to gain better control of the budgets. · In the longer term, the increase in **economic activity gained by the infrastructure investment should pay off the extra borrowing.** · The chancellor Gordon Brown also has a sustainable investment rule. This states **national debt should always be less than 40% of GDP**.

Answer 222

· Prudent fiscal policy rules to ensure stability · Total Government **debt must not be more than 60% of gross domestic product;** The Government **deficit must not be more than 3% of GDP except in particular circumstances.**

Answer 223

The Laffer Curve states that if tax rates are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from working. Equally, the Laffer Curve states that cutting taxes could, in theory, lead to higher tax revenues. Equally increasing tax rates could yield lower tax revenue due to decreased economic activity, incentives to evade and avoid, brain drain effect

Answer 224

Fiscal policy is cumbersome and can overshoot targets. If the negative output gap is less than expected and or the multiplier stronger than expected a negative output gap could turn positive leading to inflationary expectations. Monetarists believe that expansionary FP is essentially inflationary.

Answer 225

· A key issue of expansionary fiscal policy is the state of the economy. If expansionary fiscal policy is pursued when the economy is close to full capacity (e.g. AD3 to AD4), then the increased government borrowing is likely to cause crowding out and/or contribute to higher inflation – but little increase in real GDP. In a deep recession, with spare capacity in the economy, expansionary fiscal policy won’t cause crowding out or inflation. (AD1 to AD2 causes real GDP to rise from Y1 to Y2.)

Answer 226

attempt to increase aggregate demand through changing spending and taxation levels, whilst leaving the overall fiscal budget situation the same. if you increase spending and taxes equally, the increased government spending has a bigger positive impact on economic growth than the negative impact of higher taxes.

Answer 227

Regressive: QE does benefit members of society who already own shares and property Younger people found it harder to buy their first homes and build up savings QE driving up bond prices cab also make it much harder to provide pension schemes and bond prices are used to estimate the cost to provide pensions in the future

Answer 228

Coronavrius pandemic £895 bn in QE Bank became first central bank among the G7 to begin selling bonds ; 'quantitive tighetening ) 2nd Nov 2022 Unwinding of QE will make it more expensive for gov. to borrow Bonds are being sold for less than what the Bank paid so it is making a loss which will be paid by the Treasury

Answer 229

government policies aimed at increasing the productive potential of the economy and moving the supply curve to the right

Answer 230

** Market based policies** are policies which are designed to remove anything that prevents the free market system working efficiently **Interventionist policies** are policies designed to correct market failure

Answer 231

1. **Lower inflation**. 2. **Lower unemployment**; help reduce structural, frictional and real wage unemployment. 3. Improved **economic growth**. 4. Improved trade and balance of payments. By **making firms more competitive**, they will be able to export more.

Answer 232

1. Privatisation 2. Deregulation 3. Reducing taxes - income + coporation 4. Reducing state welfare payments 5. Reduced bureaucracy for firms - red tape 6. Labour market reforms

Answer 233

1. Improved efficiency 2. Lack of political interference 3. No Short term view 4. Pressure from Shareholders 5. Increased competition - royal mail compete w others 6. Government will raise revenue from the sale

Answer 234

1. Natural monopoly - since privatisation water bills risen by 40% 2. Public service - promit motive shouldn't be primary obj. 3. Government loses out on potential dividends. 4. Problem of regulating private monopolies. 5. Fragmentation of industries; lead to fragmentation of raiil industry and the **Hatfield rail crash** for no one taking responsibility of safety 6. Short-termism of firms

Answer 235

* It depends on the industry in question. * It depends on the quality of regulation. * Is the market contestable and competitive? * Can you create incentives in a nationalised firm? For example, performance-related pay could replace the profit incentive.

Answer 236

“Privatisation has had no noticeable effects in terms of trends in productivity, employment and price levels... Our overall result…..[is]… that taxpayers suffered a loss of £14bn' This was transfered to shareholders, making it regressive

Answer 237

This involves reducing barriers to entry in order to make the market more competitive. Greater competition creates incentives to reduce prices and costs. For example, UK telecoms markets are now more competitive and this has helped reduce prices and increase efficiency.

Answer 238

* Increased competition --> lower costs and prices for consumers. e.g. aeroplanes and telecoms * Government regulation often involves excessive costs of bureaucracy. * Deregulation allows consumers greater choices

Answer 239

* Natural monopoly --> no comp. e.g. local bus industries don't need comp. * Also, new private firms will seek to cherry-pick the most profitable routes and times and leave out the unprofitable off-peak services. * Deregulation could lead to a compromise of public services with a** poorer quality of provision**. Private firms have an incentive to cut costs and provide a lower quality of service. e.g. due to deregulation In the UK railway industry, the government had to take over a failing private firm on a number of occasions.

Answer 240

low income individuals and families are given the 'stick' to improve their incentives (via cuts in welfare benefits), the better-off are given the 'carrot' in the form of tax cuts. · A number of studies have shown that cutting income tax does not make people work harder and longer; it has been found that lower taxes may encourage some employees to take more leisure time as they can now gain the same disposable income by working fewer hours ScienceDirect: Lower coporation taxes have 0 effect on growth

Answer 241

Labour markets can be deregulated through policies such as * Make it easier to hire and fire workers. Abolish redundancy pay or right of appeal * Reduce maximum working weeks and minimum holiday pay. * Enable zero-hour contracts which allow firms to employ workers when demand is greater. * ** Union Busting** * **Encourage immigration**

Answer 242

* Firms will be **more efficient and competitive** * Increased trade from lower labour costs * Greater choice. * Increased labour market participation rates; among females esp. * May encourage inward investment from TNC's (Kafala System) * Lower rates of structural unemployment. * **Stabilises economic cycle**.

Answer 243

* **Lack of training**. --> low prod. (prod puzzle) * greater job insecurity --> lower morale and lower productivity for the firm in the long-run * Rising inequality; created a bigger gap between those ‘insiders’ with secure job contracts, and those ‘outsiders’ without job contracts. * Higher search costs for workers needing to find new jobs. Also, firms may have higher replacement costs for hiring more workers. Firms may end up paying a premium to employment agencies to help fill gaps in their workforce.

Answer 244

* Fall in Trade Union Membership (33%-->25%) * Growth in Zero Hour Contracts (2004: 100,000 ---> 1.03 million 2022) In recent decades the UK labour market has been characterised by * Unexpectedly low unemployment. Unemployment has fallen faster – despite relatively weak economic recovery * Poor productivity growth – Workers keener to employ workers but pay lower wage and less investment * Low real wage growth. * Increased inequality.

Answer 245

1. **Increased education and training** --> prod. 2. **Providing better information about avaliable jobs** 3. **Improved transport and infastructure** --> lower costs for firms 4. More affordable homes 5. Improved healthcare

Answer 246

· An increase in MRP (marginal revenue product) of workers -->absorb inflationary pressures + more competitive · A decrease in occupational immobility. --> lower UE

Answer 247

* **Time Lag**; not an immediate fix for any macro issues * Depends on money spent and direction, quality of TE

Answer 248

Transport has market failure of congestion and pollution. Gov spending can help reduce these Improved transport --> reduces cost of transport --> encourage firms to invest Transport bottlenecks on road, rail and air are often cited as a major stumbling block for the UK economy EVALUATION@ UK is crowded so hard to increase transport capacity

Answer 249

Building affordable council homes in expensive areas can make it easier for workers to move and find jobs in expensive areas reducing geographical immobility. Firms can suffer from labour shortages in areas that have become very expensive to live in

Answer 250

Business can face substantial costs from time lost to ill health. Improving nations health --> improve labour productivity Taxes on cigarettes, alcohol and sugar can reduce health care costs associated with drunkenness, obesity and polluted environments

Answer 251

- Productivity growth depends largely on private enterprise and trends in technological innovation - Market Based: equity - Can be counterproductive e.g. Since 2009, UK has seen a fall in structural unemployment due to more flexible labour markets- but productivity is almost stagnant - In a recession, **supply side policies cannot tackle the fundamental problem which is lack of aggregate demand** - Time. All supply side policies take a long time to have an effect e,g, education spending may not influence the economy for **20-30 years** - Expensive --> large opportunity cost - Government failure due to assymetric information

Answer 252

As the economy grows, we expect more resources to be used and we produce pollution and noise and destroy habitats. e.g. Brazil's president cut down rainforest to create prosperity. In crises, becomes less important e.g. covid and plastics

Answer 253

However in the long run economic growth may be a solution as it helps to drive the funding of technology to fix the problem which could mean a solution. Schumpeter says creative destruction. Huge profit motive, individuals become more aware and consumers become more friendly **2022 green energy investment at record levels of $1.1 trillion **

Answer 254

* Economic growth leads to larger income and thus larger demand for YED +ve imports, ceteris paribus, which increases the current account deficit Therefore the **UK might become dependent on foreign direct investment** * Conversely a government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.

Answer 255

If policies to reduce a budget deficit lead to unemployment and lower growth, the government will need to pay more on benefits and will get lower tax receipts. Therefore the deficit may experience only a small reduction. e.g. Eurozone dillema However, it depends on how you reduce a budget deficit. For example, if you raised the retirement age and made it more difficult to get welfare benefits, then you can reduce government spending, but there is little negative impact on economic growth (in fact, people have to work longer, increasing LRAS)

Answer 256

Phillips found the existence of an empirical regularity, which said that the rate of change in money wages increased as the rate of unemployment fell. This was then generalised into a relationship between unemployment and inflation e.g. **Lawson Boom, 1989 2.3% GDP Growth, 7.8% inflation**

Answer 257

However, during the 1970s , we saw high levels of unemployment and low inflation, called stagflation; short-run relationship not right **The Great Moderation** 1993-2007, had a long period of economic expansion (36 consecutive quarters) Relationship has returned to the long-run position

Answer 258

* Economic growth leads to rising incomes and asset prices. Positive wealth effect This increases the Gini coefficient (mathematical measure of the Lorenz Curve). * High income earns you savings in wealth which can earn you income in an interest rate * Property; buying house increases wealth, renting increases income and wealth increases from inflation allowing you to buy another house

Answer 259

* However, trickle-down theory where the investment and the consumption of the rich trickles down through society to redistribute income and wealth. * Relies on high income earners to invest more of their wealth. * If progressive taxation is too high it may actually cause a flat in tax revenues as there is an disincentive to earn

Answer 260

IMF studies: 'increasing the income share of poor + middle class, while a rising income share of the top 20% results in lower growth' 1980: US did tax cuts top1% have 8% share of total --> 2022 20% share LSE: '1980s tax cuts for the rich have just increased income inequality'

Answer 261

argue that in the long run there is no trade-off as Long Run AS is inelastic. Monetarists argue that if there is an increase in aggregate demand, then workers demand higher nominal wages. When they receive higher nominal wages, they work longer hours because they feel real wages have increased. but when they realise real wages are the same as last year, they change their price expectations, and no longer supply extra labour and the real output returns to its original level. Therefore, unemployment remains unchanged, but we have a higher inflation rate. The short-run Phillips curve shifts upwards to SRPC 2

Answer 262

Monetarists argue that unemployment is determined by the natural rate of unemployment so it is a supply-side phenomenon

Answer 263

Keynesians argue there can be demand deficient unemployment, and during a recession, demand-side policies can reduce unemployment in the long term