11 - Economic Performance Flashcards

Question

What is fact about coronavirus on the UK economy?

Answer 1

Coronavirus caused the UK economy to shrink 11%, the largest drop in 300 years

Answer 2

The economy is booming so demand has increase and the economy is overheating, resources are being overworked. (Worker working overtime). Producing at Y3 which larger than YP so the distance between this is positive out put gap. Producing above the potential (Y3 to YP)

Answer 3

Less demand cause a negative output gap from YP to Y1 so spare capacity in the UK

Answer 4

It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation. Main problems is rising demand-pull and cost-push inflationary pressures. Because demand will excess supply so price will rise. Countries, such as China and India, which have high rates of inflation due to fast and increasing demand, are associated with positive output gaps.

Answer 5

Demand is in excess of supply so supply will shift causing for price to increase therefore decreasing output of the economy.

Answer 6

States that there is inflation if the money supply increases at a faster rate than nominal income, persistant increase in supply of money. The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold.

Answer 7

MV = PQ Money Supply (stock of money) x Velocity of circulation of Money = Price Level x Quantity of Output

Answer 8

Economists who argue that a prior increase in the money supply is the cause of inflation.

Answer 9

Narrow monetarism centres on increases in the money supply as the prime cause of inflation

Answer 10

Broader monetarism focuses on the virtues of free markets in resource allocation

Answer 11

Everything is the same other than the T which stands for total transactions taking place in the economy but this is more difficult to measure than quantity of output.

Answer 12

- When the money supply increases, consumers have more money to spend. This causes AD to shift to the right. Firms then increase supply in the short run. A positive output gap occurs, which is inflationary - As a result, more workers are employed, so wages increase meaning costs increase for firms, so they put prices up - This inflationary pressure means the real value of money falls. Since money can buy less, there is a contraction in demand - Workers demand higher wages to make up for the increase in inflation. This leads to a left shift in the SRAS curve - The output in the economy returns to equilibrium, but the price level is higher

Answer 13

1. Economic Growth 2. Low Inflation (price stability) 3. Low Unemployment 4. Reduce Inequalities 5. Balance of Payments 6. Lower Government Borrowing (debt)

Answer 14

A growing economy is likely to experience inflationary pressures on the average price level. This especially true when there is a positive gap and AD increases faster than AS.

Answer 15

Economic Growth vs Inflation Unemployment vs Inflation Economic Growth vs Current account balance of payments Budget deficit vs Economic growth Economic growth vs Environment

Answer 16

1. The Claimant Count 2.UK Labour Force Survey

Answer 17

This counts the number of people claiming unemployment related benefits, such as Job Seeker’s Allowance (JSA). They have to prove they are actively looking for work.

Answer 18

- Not every unemployed person is eligible for, or bothers claiming JSA - Those with partners on high incomes will not be eligible for the benefit, even if they are unemployed - Although there may be instances of people claiming the benefit whilst they are employed, the method generally underestimated the level of unemployment.

Answer 19

- Been out of work for 4 weeks - Able and willing to start working within 2 weeks - Workers should be available for 1 hour per week. Part time unemployment is included. Usually gives a higher unemployment rate as part-time unemployment are less likely to claim unemployment benefits.

Answer 20

Unemployment rate - 3.8%

Answer 21

Voluntary unemployment occurs when someone chooses not to work at the current wage rate. This could be encouraged in welfare payments are generous relative to real wages. A high income tax rate might also discourage people from participating in the labour market.

Answer 22

Occurs when workers are willing to work at current market wage rates but there are no jobs available.

Answer 23

This is the time between leaving a job and looking for another job. It is common for there to always be some frictional unemployment, and it is not particularly damaging since it is only temporary. Frictional unemployment is caused due to geographical immobility, people do not want to move have family ties, and occupational immobility, need to learn skills first. For example, it could be the time between graduating from university and finding a job

Answer 24

This occurs with a long term decline in demand for the goods and services in an industry, which costs jobs. This is especially true of jobs in industries such as car manufacturing, where labour is replaced by capital (this is also called technological unemployment). Moreover, the decline of the coal and ship building industries in the UK, led to a great deal of structural unemployment.

Answer 25

This is why it is rare to get 100% employment: there will always be people moving between jobs

Answer 26

Short run growth is the percentage increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD.

Answer 27

Long run economic growth occurs when the productive capacity of the economy is increasing and it refers to the trend rate of growth of real national output in an economy over time. It is caused by increases in AS.

Answer 28

Demand sides which relates to the changes in AD on the economy. Increase in any C + I + G or X and decrease in M. Also sometimes supply side shifting SRAS curve to the right. However the main impact of supply side policies is long-term.

Answer 29

An increase in the production of economic goods and services in one of time compared with a previous period.

Answer 30

- Economic Growth uses up finite resources, oil and minerals, that can’t be replaced. - Leads to pollution and destroying environment, where the Earth can’t recover. - Growth can destroy local cultures and communities and widen inequalities in income and wealth. - Growth leads to urbanisation, big cities, swallowing up agriculture land. - Rapid population growth, more mouths to feed more poor people. - Inflation

Answer 31

- Increase standards of living and people’s welfare. - More civilised communities, who take action to improve the environment. - Provide new and more environmentally friendly technologies. - Increases the lengths of people’s lives and reduce disease. - Route out of poverty for much of the world’s economy. - Increased Tax revenue, correct market failure and provide infrastructure. - Create greater business confidence so increased investment, international competitiveness, increased profits.

Answer 32

- Some individuals, mostly the rich and many of the less well-offs benefit from higher welfare and incomes, and better prospects for the future that growth brings about - However, others ,including many of the poor, can suffer from the loss of jobs and increased inequality that can also result from economic growth - E.g. Increased automation brought about by faster economic growth may reduce overall demand for labour

Answer 33

In the UK, a recession is defined as negative economic growth over two consecutive quarters.

Answer 34

Real output increases when there are periods of economic growth. This is the recovery stage. The boom is when economic growth is fast, and it could be inflationary or unsustainable. During recessions, the real output in the economy falls, and there is negative economic growth. During recessions, governments might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes. During periods of economic growth, governments may receive more tax revenue since consumers will be spending more and earning more. They may decide to spend less, since the economy does not need stimulating, and fewer people will be claiming benefits.

Answer 35

- High rates of economic growth - Near full capacity or positive output gaps - (Near) full employment - Demand-pull inflation - Consumers and firms have a lot of confidence, which leads to high rates of investment - Government budgets improve, due to higher tax revenues and less spending on welfare payments

Answer 36

- Negative economic growth - Lots of spare capacity and negative output gaps - Demand-deficient unemployment - Low inflation rates - Government budgets worsen due to more spending on welfare payments and lower tax revenues - Less confidence amongst consumers and firms, which leads to less spending and investment.

Answer 37

When there's a shock to the usual workings of the economy e.g. a recession

Answer 38

- The sustainability of economic growth. - Fluctuation in aggregate demand/ Supply Side factors. - Asset Price bubbles - Excessive growth in credit and levels of debt. - Destabilising speculation and animal spirits. - Outside Shocks - Herding

Answer 39

Growth is sustainable when the rate of economic growth can be maintained in the long run, so future generations can enjoy the same rate of growth. Fast economic growth today could mean that natural resources, such as oil, might deplete, which would create environmental problems for future generations, and mean the future rate of growth might be weak. Unsustainable growth occurs around the boom and bust sections of the business cycle. These are essentially deviations from the trend rate of growth. If growth is excessive, there could be inflation in the average price level, wages and assets. There could be excessive credit, which is unsustainable in the long run, and the savings rate might be low and falling.

Answer 40

Growth that is financed by public debt might not be sustainable. It might be difficult to pay it back in the future, and it does not contribute to improvements in productivity. By being more productive, growth is likely to be more sustainable. This is since it increases the economy’s productive capacity, so there is more room to grow.

Answer 41

A market bubble occurs when the price of an asset is predicted to rise significantly. This causes it to be traded more, and demand exceeds supply so the price rises beyond the intrinsic value. The bubble then ‘bursts’ when the price steeply and suddenly falls to its ordinary level. This causes panic and investors try and sell their assets. It results in a loss of confidence and it can lead to economic decline or a depression.

Answer 42

- Demand shocks affect AD and supply shocks impact on AS - In some cases, an outside shock hitting the economy may affect both AD and AS - E.g. the effect on other countries of a war in the Middle East. The war might not only affect business confidence in a country such as the UK (a demand shock), but also lead to an oil shortage which increases businesses' costs of production. This would be a supply shock

Answer 43

Keynes coined the term animal spirits when describing instincts and emotions of human behaviour, which drives the level of confidence in an economy.

Answer 44

Destabilising speculation leads to changes in the price level in a market, as a result of speculation. Speculators purchase assets when they believe the price is likely to appreciate. Conversely, assets are sold when the price is believed to depreciate. This can affect the actual price of assets in an economy. If firms expect a high rate of return, they will invest more. Firms need to be certain about the future, otherwise they will postpone their investments. Expectations about society and politics could affect investment. For example, if a change in government might happen, or if commodity prices are due to rise, businesses may postpone their investment decisions.

Answer 45

Herding is the act of reacting to the behaviour of other economic agents rather than the market. This might be because some investors think other economic agents are better informed about the market, so they follow their actions. This can cause instability in the market.

Answer 46

- Rate of inflation - Unemployment - Investment

Answer 47

This type of unemployment is worsened by the geographical and occupational immobility of labour. If workers do not have the transferable skills to move to another industry, or if it is not easy to move somewhere jobs are available, then those facing structural unemployment are likely to remain unemployed in the long run.

Answer 48

Unemployment arising in different seasons and points of the year. Usually from the weather and the end of the Christmas shopping period. During the summer, more people will be employed in the tourist industry, when demand increases.

Answer 49

Deindustrialisation the decline of manufacturing industries, together with coal mining.

Answer 50

This is caused by a lack of demand for goods and services(lack of aggregate demand), and it usually occurs during periods of economic decline or recessions. It is linked to a negative output gap.

Answer 51

Firms are either forced to close or make workers redundant, because their profits are falling due to decreased consumer spending, and they need to reduce their costs. This then causes output to fall in several industries. This type of unemployment could actually be caused by increases in productivity, which means each worker can produce a higher output, and therefore fewer workers are needed to produce the same quantity of goods and services.

Answer 52

Unemployment caused by real wages being stuck above the equilibrium market real wage. Examples,is national minimum wage.

Answer 53

1. If demand then shifts to the left, due to a fall in consumer spending for example, there would be more unemployment since wages are not able to adjust. Classical economists would argue that by letting wages be flexible, by removing trade union power and removing the NMW, wages could fall and unemployment would fall to 0. 2. However, cutting wages during times of weak consumer spending would cause further falls in consumer spending, and there would be even lower economic growth. Moreover, the classical economist argument is made on the assumption of a perfectly competitive market, which is not true in reality.

Answer 54

Full employment is never actually achieved. So frictional and structural unemployment make up what is called equilibrium unemployment. This is when the economy’s aggregate labour market is in equillibrium. This type of unemployment is the difference between those who are willing to have a job at the current market wage level, and those who are willing and able to have a .job

Answer 55

Total or collection

Answer 56

There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases. People turning to other mends to make money.

Answer 57

If consumers are unemployed, they have less disposable income and their standard of living may fall as a result. Exp, more unhealthy diet. Apart from the unemployed that enjoy 24 hour leisure time. There are also psychological consequences of losing a job, which could affect the mental health of workers. Social exclusion and no hope for work.

Answer 58

With a higher rate of unemployment, firms have a larger supply of labour to employ from. This causes wages to fall, which would help firms reduce their costs. However, with higher rates of unemployment, since consumers have less disposable income, consumer spending falls so firms may lose profits. Producers which sell inferior goods might see a rise in sales. It might cost firms to retrain workers, especially if they have been out of work for a long time. Higher business taxes to pay benefits to the more unemployed people

Answer 59

If the unemployment rate increases, the government may have to spend more on JSA (job seekers allowance) which incurs an opportunity cost because the money could have been invested elsewhere. The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend.

Answer 60

With unemployment, there is a waste of workers’ resources. They could also lose their existing skills if they are not fully utilised. Opportunity cost to economy/society since workers could have produced goods and services if employed. Not producing at maximum capacity on PPF curve. High unemployment reduces firms incentive to INVEST in new state-of-the-art technology or capital intensive technologies. As plenty of unemployed labour means labour is cheaper. This reduces competitiveness of exports from no dynamic effeceiency.

Answer 61

Helps the economy function better. Downward pressure on wage rates reduces inflation. Also difference in pays of high-skilled workers and low-skilled workers, pay differential creates incentives to work hard.

Answer 62

Globalisation also contributes to structural unemployment, since production in the manufacturing sectors, such as in clothing or motor cars, moves abroad to countries with lower labour costs. This means that workers trained for these jobs will become unemployed, because the industry has declined in size or has been removed from the economy.

Answer 63

Migrants are usually of working age, so the supply of labour at all wage rates tends to increase with more migration. There could be more competition to get a job due to the rise in the size of the working population. Migrants tend to be of working age, and many are looking for a job. Migrants tend to bring high quality skills to the domestic workforce, which can increase productivity and increase the skillset of the labour market. This could increase global competitiveness.

Answer 64

A benefit, in the form of money, for people are unemployed or not in full time employment but are capable and looking for work.

Answer 65

- Supply side policies - Improving the occupational mobility of labour - Reducing unemployment search periods - Improving the geographical mobility of labour

Answer 66

(More in detail in chapter 13)

Answer 67

Equilibrium of national income,e is at point X, with real output and the price level at Y1 and P1 The SRAS curve shifts to the left and up from SRAS1 to SRAS2. As there is an increase in production costs from the wages or increase raw materials. As a result of a shift the price level increase to P2. Higher production costs have reduced the equilibrium level of output that firms are willing to produce to Y2. The new equilibrium national income is at point Z.

Answer 68

A depreciation in the exchange rate, which causes imports to become more expensive, whilst exports become cheaper. This causes AD to rise. Fiscal stimulus in the form of lower taxes or more government spending. This means consumers have more disposable income, so consumer spending increases. Lower interest rates makes saving less attractive and borrowing more attractive, so consumer spending increases. High growth in UK export markets means UK exports increase and AD increases.

Answer 69

Changes in world commodity prices can affect domestic inflation. For example, raw materials might become more expensive if oil prices rise. This increases costs of production. Labour becomes more expensive. This could be through trade unions, for example. Expectations of inflation- if consumers expect prices to rise, they may ask for higher wages to make up for this, and this could trigger more inflation. Indirect taxes could increase the cost of goods such as cigarettes or fuel, if producers choose to pass the costs onto the consumer. Depreciation in the exchange rate, which causes imports to become more expensive and pushes up the price of raw materials. Monopolies, using their dominant market position to exploit consumers with high prices

Answer 70

Those on low and fixed incomes are hit hardest by inflation, due to its regressive effect, because the cost of necessities such as food and water becomes expensive. The purchasing power of money falls, which affects those with high incomes the least. If consumers have loans, the value of the repayment will be lower, because the amount owed does not increase with inflation, so the real value of debt decreases. Great for house owners, value of mortgage falls.

Answer 71

Low interest rates means borrowing and investing is more attractive than saving profits. With high inflation, interest rates are likely to be higher, so the cost of investing will be higher and firms are less likely to invest. Workers might demand higher wages, which could increase the costs of production for firms. Firms may be less price competitive on a global scale if inflation is high. This depends on what happens in other countries, though. Unpredictable inflation will reduce business confidence, since they are not aware of what their costs will be. This could mean there is less investment.

Answer 72

The government will have to increase the value of the state pension and welfare payments, because the cost of living is increasing.

Answer 73

Real incomes fall with inflation, so workers will have less disposable income. If firms face higher costs, there could be more redundancies when firms try and cut their costs.

Answer 74

Inflation expectations play a key role in the actual inflation rate. The self-fulfilling prophecy of “inflationary psychology” explains how expectations of higher prices, encourage consumers to spend now rather than later, on the assumption that goods and services will be cheaper now, than later. This increases demand and pushes up prices. Thus, the high inflation expectation causes higher inflation.

Answer 75

- Distributional effects - Distortion of economic behaviour - Breakdown in the functions of money - Reduced international competitiveness - Shoe leather and menu costs

Answer 76

Most people’s wages have stayed the same or only very slightly increase. Except the anomalies like bankers, footballers, executives. Or also trade unions, like the train driver on the underground getting massive pay increases.

Answer 77

Soaring food and energy bills were the main causes of the UK's recent high inflation. Oil and gas were in greater demand after the Covid pandemic, and prices surged again when Russia invaded Ukraine, cutting global supplies. The conflict also reduced the amount of grain for sale, pushing up food prices. (Ukraine especially) Inflation soared to 11.1% in October 2022, the highest rate for 40 years. The rate has fallen significantly since then, but lower inflation doesn't mean prices are falling - just that they are rising less quickly.

Answer 78

The UK experienced a short period of deflation in April 2015, when prices fell by 0.1%. Before this, the UK experienced deflation in the 1960s.

Answer 79

Deflation discourages spending because it makes goods and services cheaper in the future. Consumers believe that, if goods are cheaper tomorrow, it is not worthwhile buying them today. This can result in economic decline and increasing rates of unemployment. Deflation can worsen the effects of economic stagnation.

Answer 80

Deflation makes the real value of debt higher. This means that consumers with high levels of debt find it harder to pay it off, since a larger proportion of their income will be used to make repayments. Since consumers have less disposable income, the level of spending in the economy falls, which worsens the effects of a recession. Wages are also likely to fall, since firms make lower profits.

Answer 81

There could be even lower growth and worse rates of unemployment if the real interest rate increases. If the interest rate is 0% and the deflation rate is 5%, the real interest rate is 5%. This means that saving is encouraged, because the rate of return is higher.

Answer 82

Supply-side/Good deflation results from improve,ents in the economy’s supply side, which reduces businesses costs of production. SRAS and LRAS shift to the right and AD stays the same so the price level falls, but employment and output increases. Mainly short term.

Answer 83

Caused by a collapse of aggregate demand causing a persistant recession. Large negative output gap - high level of spare capacity, possible credit crunch.

Answer 84

1. Economic growth – positive and sustainable growth (The UK, long-run trend rate is around 2.5%) 2. Low inflation (UK target 2% +/-1) 3. Low unemployment / Full employment (e.g. around 3%) 4. Current account – balance of payments. Satisfactory position (i.e. avoid unsustainable current account deficit) 5. Low government borrowing/public sector debt. 6. Exchange rate stability 7. MINIMISE INEQUALITY 8. Protect Environment

Answer 85

A negative output gap occurs when the actual level of output is less than the potential level of output. This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so labour and capital are not used to their full productive potential. This means there is a lot of spare capacity in the economy.

Answer 86

A positive output gap occurs when the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation. Countries, such as China and India, which have high rates of inflation due to fast and increasing demand, are associated with positive output gaps.

Answer 87

Based on evidence from the economy. Shows the trade-off between the rate of inflation and the rate rate of unemployment.

Answer 88

Un = natural rate of unemployment

Answer 89

As the rate of unemployment falls, labour shortages may cause an increase in wage inflation leading to higher unit labour costs When an economy is booming, so does the derived demand for and prices of components and raw materials – this leads to higher costs Rising demand and falling unemployment can lead to suppliers raising prices to increase their profit margins. Falling unemployment increases trade Union monopoly power so they can increase wages.

Answer 90

A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increases faster than AS.

Answer 91

Neo-classical economists believe that in the long output always returns to a long run equilibrium path They also argue that an economy will tend to revert to a level of output where unemployment returns to the natural rate of unemployment made up of frictional and structural Unemployment. The Long Run Phillips Curve is drawn as vertical i.e. it is assumed to be independent of the level of short run demand/output and the general price level

Answer 92

If the government tries to lower unemployment in the short run, there could be inflationary pressure on the price level. In the short run, the economy suffers from demand-deficient unemployment. This might encourage the use of demand-side policies to tackle unemployment

Answer 93

In the long run, changes in the unemployment rate do not affect the inflation rate. Therefore, policies can be more flexible. Since there is no demand-deficient unemployment in the long run, supply-side policies are more likely to be used.

Answer 94

- In the short run policy’s must be decided on how to increase Output of the economy, if it is below its maximum capacity - In the long-run policy must be decided on how to increase this economy maximum output.

Answer 95

Successful supply side policies like: Improve the occupational mobility of labour force Attract more people into an active search for work Lift labour productivity These policies can lead to a fall in the natural rate of unemployment (frictional + structural unemployment). This causes the long run Phillips Curve to shift to the left

11 - Economic Performance Flashcards

(140 cards)