Macro Structures Flashcards

1
Q

Explain why measuring unemployment in a country is difficult.

A
  • Hidden unemployment - discouraged workers (e.g. part-time)
  • Informal economy - e.g. unregistered businesses
  • Does not account for disparities e.g. age, gender, ethnicity
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2
Q

Explain why structural unemployment might occur in an economy.

A
  • Technological advancements displacing the need for human labor
  • Lack of skills to match the demand in the economy
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3
Q

Explain the cause of cyclical demand.

A
  • Low levels of aggregate demand due to e.g. low consumption, low investment
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4
Q

Explain what is meant by the natural rate of unemployment.

A
  • When the economy is producing at full-employment real output
  • The lowest achievable unemployment in an economy
  • Only seasonal, frictional, structural
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5
Q

Explain how a better trained and more educated labor force may affect economic growth.

A
  • More skills and qualifications;
  • Higher productivity;
  • Produce more output per unit of time;
  • Quality of labor increases, shifting LRAS outwards, higher potential output
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6
Q

Explain the causes of economic growth in terms of an increase in real output and an increase in potential output.

A

Real Output

  • Increase in aggregate demand
  • Due to an increase in consumption, investment, government spending, exports
  • Or decrease in costs of production

Potential output

  • Increase in LRAS
  • Improvements in quality and quantity of FOP
  • E.g. technological advancements
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7
Q

Explain the potential effects on the economic growth rate from a substantial increase in the number of skilled people of working age entering a country.

A
  • Increases the quantity of human labor
  • Expands the labor force
  • Increases LRAS/PPC shifts outward
  • Increases potential output
  • Increase in the productivity of the economy
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8
Q

Explain why a high rate of inflation may negatively affect both a country’s export competitiveness and the level of capital investment of firms.

A

Export competitiveness

  • Exports become more expensive
  • Imports cheaper in comparison
  • Exports become less internationally competitive
  • Consumers demand for more imports
  • Export revenue reduced
  • Worsens current account balance

Capital investment

  • reduces real returns on fixed income investments, e.g. corporate bonds
  • inflation may be tackled with higher interest rates
  • cost of borrowing increases and investments become less lucrative
  • low incentive to invest
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9
Q

Explain two causes of demand-pull inflation.

A

Decrease in tax rates

  • Increase in disposable income
  • Greater purchasing power
  • More able to purchase G&S
  • Increase consumption
  • Increase AD

Decrease in interest rates

  • Cost of borrowing decreases
  • Rate of return from savings increases
  • More incentive to decrease saving and increase borrowing
  • Spend more on long-term payment goods e.g. housing, cars
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10
Q

Explain the causes of cost-push inflation.

A

Increased tariffs on foreign importers

  • Imports entering the country become more expensive
  • Cost of inputs and raw materials increase
  • Cost of production increases

Higher minimum wages

  • Price floor on the minimum wage workers receive
  • Cost of production increases
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11
Q

Explain the difficulties involved in measuring inflation using CPI.

A
  • Does not take into account the changes in tastes and preferences
  • Does not show consumption differences between different income groups
  • Does not reflect changing costs of living
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12
Q

Discuss whether deflation is always more detrimental than inflation.

A

Cons of deflation

  • Downward deflationary spiral
  • Cyclical unemployment

Pros of inflation

  • Demand-pull inflation indicates high levels of AD and economic growth

Cons of inflation

  • Real value of incomes decrease
  • Lowers standard of living
  • Rising income inequality
  • Cost-push inflation caused by increasing cost of production

Pros of deflation

  • Deflation due to supply-side factors
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13
Q

Discuss whether high levels of unemployment is the most serious economic problem a country can face.

A

Cons of unemployment

  • Lower incomes worsens standard of living
  • Increased spending on transfer payments worsens budget deficit
  • Decrease in gov tax revenue

“Pros” of unemployment

  • Cyclical unemployment associated with downturns but can be resolved when AD increases

Other problems

  • High inflation rates: worsens income distribution, lower economic growth
  • Deflation: negative economic growth leading to recession
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14
Q

Discuss whether economic growth always improves living standards in an economy.

A

Yes

  • Purchasing power increases
  • Quality of life increases, e.g. literacy rates
  • Reduces cyclical unemployment

No

  • Rising income inequality
  • Worker exploitation
  • Negative externalities e.g. air pollution
  • Structural unemployment could increase
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15
Q

Evaluate the effectiveness of using fiscal policy to stimulate the economy during a recession.

A

Pros

  • Government spending directly influences AD
  • Lower tax rates encourages consumption and investments

Cons

  • Substancial time-lag in decision-making and the implementation
  • Effectiveness limited when there is low confidence
  • Cannot deal with supply-side causes of recession
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