Macro Structures Flashcards
Explain why measuring unemployment in a country is difficult.
- Hidden unemployment - discouraged workers (e.g. part-time)
- Informal economy - e.g. unregistered businesses
- Does not account for disparities e.g. age, gender, ethnicity
Explain why structural unemployment might occur in an economy.
- Technological advancements displacing the need for human labor
- Lack of skills to match the demand in the economy
Explain the cause of cyclical demand.
- Low levels of aggregate demand due to e.g. low consumption, low investment
Explain what is meant by the natural rate of unemployment.
- When the economy is producing at full-employment real output
- The lowest achievable unemployment in an economy
- Only seasonal, frictional, structural
Explain how a better trained and more educated labor force may affect economic growth.
- More skills and qualifications;
- Higher productivity;
- Produce more output per unit of time;
- Quality of labor increases, shifting LRAS outwards, higher potential output
Explain the causes of economic growth in terms of an increase in real output and an increase in potential output.
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
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.
- 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
Explain why a high rate of inflation may negatively affect both a country’s export competitiveness and the level of capital investment of firms.
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
Explain two causes of demand-pull inflation.
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
Explain the causes of cost-push inflation.
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
Explain the difficulties involved in measuring inflation using CPI.
- 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
Discuss whether deflation is always more detrimental than inflation.
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
Discuss whether high levels of unemployment is the most serious economic problem a country can face.
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
Discuss whether economic growth always improves living standards in an economy.
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
Evaluate the effectiveness of using fiscal policy to stimulate the economy during a recession.
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
