trial uno for unit 2

Question 1

(cost-push inflation)

Answer 1

Caused when higher costs result in firms making higher prices
The cost of producing goods & services can rise when costs of resources increase. For example, workers demanding higher wages which are not matched by increases in productivity (output per worker per hour)
Firms may need to pass these higher costs onto the customer in the form of higher prices in order to maintain their profits.
This can lead to a WAGE-RATE SPIRAL – higher wage demands lead to higher prices which in turn leads to higher wage demands and so on…
Oil prices are having a huge impact on prices currently.

Question 2

(demand-pull inflation)

Answer 2

Too much demand chasing too few goods!
Inflation is caused by increases in aggregate demand brought on by increases in government, consumer and business spending
If demand is greater than supply, this will cause the prices of goods & services to rise as businesses realise that there is sufficient enough demand to merit higher prices being charged.

Question 3

Measures to reduce unemployment

Answer 3

When economy at peak government taxes increase and decrease spending
When economies are at a low peak, governments decrease taxes and increase spending.
Increase spending on infrastructure which will create jobs and reduce unemployment
Decrease corporation tax for companies which means they have greater after tax profits which they can invest in their business thus creating employment
Furlough structures help to reduce unemployment
A decrease in corporation tax this attracting foreign direct investment (FDI)
Reduce interest rates, more firms take loans and then spend in the economy.

Question 4

Harmful effects of inflation on firms

Answer 4

Reduces real value of profits of firms
Reduces willingness to invest – uncertainty about future costs and prices.
Menu Costs – Cost of constantly changing menus and pricing records.
May lead to a wage-rate spiral (workers demand higher wages as businesses are charging higher prices)
It encourages inefficiency in markets where there is little competition as firms may simply increase prices in line with inflation

Question 5

Harmful Effects of Inflation on Individuals

Answer 5

Reduces standard of living for those whose incomes are fixed or which do not rise at the same rate as inflation.

Reduces the value of their savings (£100 saved 100 years ago is worth a lot less now!) as it reduces the real rate of interest. Borrowers gain though. (next slide for data)

Reduces their spending power (purchasing power) – cannot satisfy all wants

Difficult for those on fixed incomes (e.g. pensioners) who are worse off in real terms

Those workers who are professionals or have strong trade unions may be able to negotiate a pay increase

Question 6

Harmful effects of inflation on the Economy:

Answer 6

Could lead to unemployment if demand falls due to higher prices
May lead to higher savings (withdrawals from circular flow of income) but only if the inflation rate is relatively low.
Firms may cut expenditure on factors of production
Can lead to uncompetitiveness abroad (further increase the current account deficit on the balance of payments)
May lead to ‘expectations’ based inflation which takes longer to correct
May lead to lower economic growth if investment in the UK falls

Question 7

Effects of economic growth on standard of living

Answer 7

Benefits
Economic growth is an increase in the productive potential of the economy/ shift to the right of the ppc - this usually involves an increase in output
Boosts average living standards because individuals prefer to consume more than fewer goods and services. Producing more goods and services enables people to consume more products and so have higher material living standards

Costs
Economic growth can raise material living standards but not everyone may benefit if the extra income generated is unevenly distributed
Real gdp per capita may rise but this is only on average. Some people may experience no increase in income and so may even experience a fall in income.

Question 8

“Gross Domestic Product growth”

Answer 8

is an increase in the value of goods and services produced in an economy within a period of time

Question 9

Effects of economic growth on unemployment

Answer 9

Unemployment may decrease (ID) as creating economic growth may have increased demand for labour (1). More people in work increases consumer spending/AD. This will stimulate further growth/a positive multiplier effect (DEV) (1).
Unemployment may decrease (ID) as the growth may have increased tax revenue which the government can invest (1).
Government investment in eg capital projects creates jobs (DEV) (1).
o Government may also use increased revenue to fund increased public sector wages/schemes to improve employment (DEV) (1). This will incentivise more people to enter the labour market (DEV) (1).