Unit 13

Question 1

Graphs tend to correlate high unemployment with

Answer 1

Low GDP growth

Question 2

Recession definition

Answer 2

output is declining, recession is over once the economy begins to grow again.

Question 3

What does Okun’s law measure?

Answer 3

Measures the correlation between unemployment and GDP growth through regression analysis.

Question 4

Two main reasons why unemployment rate responds only partially to changes in economy’s growth rate:

Answer 4

• labour hoarding where firms find it profitable to keep workers on payroll even when demand is too low for them all got be fully utilised
• Some people who take jobs in an upswing were not previously unemployed, they were inactive, when firms advertise more vacancies, benefits from job search rise and out of labour force yutes join employment. So OUTPUT rises but unemployment rate does not fall.

Question 5

What is Okun’s law?

Answer 5

Change in unemployment rate,t = Okuns coefficient(GDP growth - normal growth rate)

Can model as a regression line, and calculate r-squared to measure the fit.

Question 6

Fall in output leads to

Answer 6

Rise in unemployment rate = fall in wellbeing

Question 7

GDP definition

Answer 7

Total output of all producers in a country

Question 8

Alternate measures of GDP

Answer 8

• spending - total spent by households, firms, gov and foreign on export
• Production - value added by each industry - value of all outputs - value of inputs at each production stage
• Income - sum of all incomes/ profits received and taxes received by government

Question 9

Percentage change in GDP formula

Answer 9

Sum of (%change of each component x weight of GDP)

Question 10

Shortcomings of GDP as a measure

Answer 10

• does not take into consideration the impact on the environment
• Does not tell us individual spending power - distinction from GDP per capita
• Flawed measure of living standards

Question 11

Responses to household shocks

Answer 11

• self insurance: households which encounter high income randomly, will save so when luck is gone they have savings.
• Co insurance: households which have been fortunate during a period might help a household which is struggling

Question 12

Self and co insurance reflect important aspects of household preferences:

Answer 12

• people prefer a smooth pattern of consumption - so they will self insure
• Households are not wholly selfish - willing to provide support to each other to smooth good or bad luck periods

Question 13

Economy wide shocks

Answer 13

• co insurance is less effective if bad shock hits everyone.
• But some say community survival depends on less badly hit households help the worst hit households

Question 14

After an economic shock impact on path model

Answer 14

• individual must make judgement on if it is temporary or permanent
• If shock is permanent, should adjust red line above, up or down to reflect level of consumption individual adopts, consistent with forecast income
• If shock is temporary, little will change, wont have much effect on lifetime consumption plan, as only small difference to lifetime income.

Question 15

Why consumption smoothing is not always possible

Answer 15

• credit constrained
• Weakness of will - cant carry out plans
• Limited co-insurance - low family or welfare system aid

Question 16

What is consumption smoothing

Answer 16

Financial strategy to maintain relatively stable level of consumption over time.

Question 17

Difference on path model for consumption constrained households

Answer 17

They cannot borrow money after hearing of a pay rise, and thus will have significantly lower until they receive pay rise

Question 18

Impact on utility of credit constraints

Answer 18

If can borrow after shock, instead of y’ now, can consume at c’ and c’ later as debt has to be repaid, but this is good as it takes you to the highest possible indifference curve.

Being limited or credit excluded limits ur utility.

Question 19

Impact on path model of weakness of will

Answer 19

• receive news about fall in future incomes, so should plan to save money to accommodate
• weakness of will means not saving, and thus can not smooth consumption

Question 20

Volatility of investment

Answer 20

low expectations of future demand - low capacity utilisation and low profits - no incentive to incest or hire = little spending by firms or workers - cycle

Question 21

Relationship between business confidence and investment

Answer 21

Very strong correlation

Question 22

GDP deflation

Answer 22

Ratio of nominal GDP to real GDP
- takes into account prices of ALL g+s produced within borders of a country, regardless of where they end up

While CPI only looks at what’s been consumed by households, regardless of origin

Question 23

What’s unit 13 about

Answer 23

Analysing key ideas on a National scale

Question 24

Value added

Answer 24

Shirt sold for £100
- shirt industry buys cloth for £80
- who buys cotton from raw cotton industry for £50
- final GDP of this economy is £00 due to value of final sale.
- 50, 30, 20 are all value added = £100 as well

Question 25

Consumption smoothing households in the face of news of a rise in future income received

Answer 25

Consumption exceeds income, financed by borrowing, then when actual income rises, income exceeds consumption in order to pay debt

Question 26

Investment decisions as a coordination game

Answer 26

NE, invest invest or don’t, dont

Question 27

Assume that a household has access to credit.
- which of the following likely to have a significant effect on LR consumption?
- temporary reduction in income
- temporary rise interest rates
- unexpected promotion to a senior position

Answer 27

F
F
T