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economics a-level > 4.2.3 Economic Performance > Flashcards

4.2.3 Economic Performance Flashcards

1
Q

What is short run growth caused by?

A

Increases in AD

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2
Q

What is long run growth caused by?

A

Increases in AS

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3
Q
A
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4
Q

When does a positive output gap occur?

A

When demand shifts outwards

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5
Q

What are characteristics of a boom?

A
  • High rates of economic growth
  • positive output gaps
  • full employment
  • demand-pull inflation
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6
Q

What are characteristics of a recession?

A
  • Negative economic growth
  • Negative output gaps and spare capacity
  • demand-deficient unemployment
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7
Q

What is an asset price bubble?

A

When the price of an asset which is predicted to rise significantly suddenly falls and causes investors to panic and try and sell their assets

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8
Q

What is herding?

A

Reacting to the behaviour of other economic agents rather than the market

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9
Q

What is cyclical unemployment caused by?

A

A lack of demand for goods and services
Or
Increases in productivity meaning fewer workers are needed

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10
Q

What are some consequences of unemployment?

A
  • Less disposable income means consumers’ living standards fall
  • Loss of skills
  • Negative externalities such as crime
  • opportunity cost to society (loss of goods and services)
  • Government have to spend more on Jobseeker’s Allowance
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11
Q

What is disinflation?

A

The falling rate of inflation

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12
Q

What are the triggers of demand-pull inflation?

A
  • A depreciation in the exchange rate
  • Fiscal stimulus
  • Lower interest rates
  • Increase in uk exports
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13
Q

When does cost-push inflation occur?

A
  • Labour becomes more expensive
  • Indirect taxes
  • Depreciation in the exchange rate
  • Changes in world commodity prices (raw materials)
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14
Q

What are the effects of deflation?

A
  • Decreases spending
  • Makes value of real debt higher as debt does not fall with price
  • wages fall as firms make less profits
  • worse rates of unemployment
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15
Q

What is the equation of exchange?

A

MV = PQ
Supply of money x velocity of circulation = price level x quantity of goods sold

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16
Q

What is the difference between short-run growth and long-run growth?

A

Short run - brings idle resources into production
Long run - increases the economies productive potential

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17
Q

How do we show short-run growth on a graph?

A

AD shifts right OR SRAS shifts to the right

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18
Q

What demand-side factors determine short run growth?

A

The components of AD|
C + I + G + (X-M)

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19
Q

What supply-side factors determine short run growth?

A
  • A fall in costs of production
  • A fall in taxes imposed on firms
  • Increase in subsidies paid to firms
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20
Q

What supply-side factors determine long run growth?

A

Anything that increases Labour productivity
Eg
- improvements in technology
AND increase of the size of Labour force

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21
Q

How do demand-side factors determine long run growth?

A

Firms will only produce more goods ad services if their is sufficient demand in the economy to absorb the extra output

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22
Q

What are the costs of economic growth?

A
  • Uses up finite resources such as oil
  • Pollution
  • Can destroy culture and communities
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23
Q

What are the benefits of economic growth?

A
  • Increases standards of living/welfare
  • Greater business confidence
  • produces a fiscal dividend and the tax revenues can be used to correct market failures
24
Q

What is the economic cycle?

A

The upswing and downswing in aggregate economic activity taking place over 4-12 years

25
Q

What is a depression?

A

A severe recession lasting more than 2 years

26
Q

What is a recession?

A

Real national output falling for 6 months or more

27
Q

When was the last recession in the UK?

A

2008

28
Q

What is a positive output gap?

A

When real GDP > productive potential of the economy

29
Q

What factors cause change in the phases of the economic cycle?

A
  • Fluctuations in AD
  • Supply side factors
  • Speculative bubbles
30
Q

What happens to employment in the boom and recovery phases ?

A

Employment increases

31
Q

What does a positive output gap mean?

A

The economy economy temporarily produces a level of output to the right of the LRAS curve and above the normal capacity level of output

32
Q

Disadv. Of a positive output gap

A

Because it represents the over us of capacity, it cannot be sustained for long

33
Q

What are the main UK measures of unemployment?

A

The claimant count
The Labour Force Survey

34
Q

What is involuntary and voluntary unemployment?

A

Involuntary - when workers are willing to work at current market wages but there are no jobs available
Voluntary - when workers choose to remain unemployed and refuse job offers at current market wage rates

35
Q

What is frictional unemployment?

A

The transition stage where a worker is unemployed when moving from one job to another

36
Q

What is structural unemployment?

A

When a person does not have a sufficient skill-set or the qualifications needed for a job

37
Q

What is cyclical unemployment?

A

Unemployment caused by a lack of aggregate demand in an economy (negative output gap)

38
Q

What causes frictional and structural unemployment?

A

Supply-side factors

39
Q

What is real wage unemployment?

A

Unemployment caused by real wages being stuck above the equilibrium market-clearing real wage

40
Q

What is the natural rate of unemployment?

A

The rate of unemployment when the aggregate Labour market is in equilibrium

41
Q

What does the Labour market diagram look like?

A

AD AS diagram with employment on X axis and real wage rate on Y axis

42
Q

What are the consequences of unemployment on the economy?

A
  • less competitiveness
  • wasted human capital
  • more benefits claimed
43
Q

What are the advantages of unemployment on the economy?

A
  • downward pressure on wage rates
  • reduced inflation
44
Q

What are the consequences of unemployment on individuals?

A

Lower standards of living
Engagement in the black economy

45
Q

MV = PQ

A

Money supply x velocity of circulation = price level x quantity of output

46
Q

What is the roel of expectations in the inflationary process?

A

If people expect that the rate of inflation next year is going to be high, they will behave in an inflationary way now

47
Q

What are the disadvantages of inflation?

A
  • reduced competitiveness as exports increase in price
  • distorted consumer behavior
  • distributional effects
48
Q

What happens to inflation in a positive output gap?

A

It increases

49
Q

What diagram MUST be used in an MEO conflict question?

A

Short Run or Long Run Phillip’s curve

50
Q

What goes on the Y axis of a Phillips curve?

A

Inflation rate (%)

51
Q

What goes on the X axis of a Phillips curve?

A
52
Q

What is the relationship between wage inflation rate and unemployment rate?

A

Stable, inverse and non-linear

53
Q

WHERE DOES THE LONG RUN PHILLIPS CURVE intersect THE SHORT RUN PHILLIPS CURVE?

A

Where the rate of inflation = 0
Where there is a natural rate of unemployment (Un)

54
Q

Explain why monetarists believe there is no trade-off between unemployment and inflation

A
  • AD increases
  • Causing demand pull inflation
  • Firms have higher revenues
  • firms will higher more
  • eventually firms and workers will see through the money illusion and see that increases in revenue were nominal (not accounting for inflation)
  • So firms will hire less
  • unemployment returns to NRU so LRPC is always a straight line from NRU
55
Q

What are key MEO conflicts?

A

Unemployment vs inflation
Economics growth vs inflation
Inflation vs controlled BOP

economics a-level (15 decks)

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