3.3 Macroeconomic Objectives

Question 1

What is the definition of “economic growth”?

Answer 1

An increase in real GDP over a period of time. We use Real GDP because Economic growth measures an increase in actual output/productions in the economy.

Question 2

What does the production possibilities curve show?

Answer 2

combinations of maximum output that can be produced in an economy with fixed resources and technology

Question 3

Why is it highly unlikely an economy will produce on the PPC?

Answer 3

Because in the real world it’s near impossible to achieve maximum or full employment. Therefore a country is most likely to be producing at a point inside its PPC.

Question 4

What kind of growth can be achieved in the short run?

Answer 4

Growth in ACTUAL output. This is because it can occur over short periods of time and is due to reductions in unemployment or inefficiency of production.

Question 5

What kind of growth can be achieved in the long run?

Answer 5

Growth in POTENTIAL output. Potential growth, or growth in production possibilities is long-term growth, because it usually requires long periods of time and relies on increase in quantity or quality of factors of production.

Question 6

How can more output be produced in the long run?

Answer 6

By shifting the PPC outwards

Question 7

What factors cause the PPC to shift outwards

Answer 7

increases in QUALITY and/ or QUANTITY of resources

Question 8

What happens if the potential output increases (PPC shift outwards), but the actual output remains the same?

Answer 8

Then the economy can produce more output than before, however currently it is still producing at the same level of output

Question 9

What is the equation used to calculate economic growth?

Answer 9

% change in real GDP = (final value of real GDP - initial value of real GDP ) / initial value of real GDP

Question 10

What happens if real GDP is growing slower than the population?

Answer 10

That means the real GDP per capita decreases

Question 11

What is the equation that links % change in population and % change in real GDP?

Answer 11

% change in real GDP per capita = % change in real GDP - % change in population

Question 12

What is “inflation”?

Answer 12

Price levels are rising at an increasing rate
“persistent rate of change in price of goods and services in an economy over a period of time. “

Question 13

What is “deflation”?

Answer 13

Price levels are falling

Question 14

What is “disinflation”?

Answer 14

Prices levels are rising at a falling rate

Question 15

What is the difference between “disinflation” and “deflation”?

Answer 15

Deflation means that price levels are falling (so, below 0%), whilst disinflation means that price levels are still rising, however the rate is decreasing (eg. 3% –> 2%)

Question 16

What are the two types of inflation?

Answer 16

• Cost-push inflation
• Demand-pull inflation

Question 17

What is cost-push inflation?

Answer 17

It is caused due to a fall in aggregate supply in an economy. The possible reason for the fall in AS (increase in labour costs, increase in cost of resources or supply shocks). The AS shifts to the left which reduces the price and also reduces the real GDP the economy. This is not a desired method of increase in price levels - as this price increase comes at the cost of economic contraction

Question 18

What is another term used to describe “cost-push” inflation?

Answer 18

STAGFLATION
- Stagnation + Inflation + Unemployment

Question 19

What is demand-pull inflation?

Answer 19

This is caused due to an increase in aggregate demand in the economy. (A rise in any component of AD will shift the AD to the right and cause demand-pull inflation.

Question 20

Is this considered ‘good’ or ‘bad’ deflation?

Answer 20

Bad deflation - Prices fall, but an economic contraction (fall in real GDP)

Question 21

Is this considered ‘good’ or ‘bad’ deflation?

Answer 21

Good deflation - prices fall but economy expands (increase in real GDP)

Question 22

What is the “CPI”?

Answer 22

[Consumer Price Index]
CPI is a measure of the cost of living for the typical household, and compares the value of a basket of goods and services one year, to the value of the basket of goods and services in the base year.

Question 23

How do you calculate inflation/ deflation with the CPI?

Answer 23

[Price of the basket in given year / price of the basket in the base year] x 100 = Price Index
Price index - 100 = % inflation rate

Question 24

What is going on when CPI = 100?

Answer 24

then that is base year and there is NO inflation/ deflation

Question 25

What happens when inflation takes place?

Answer 25

• Purchasing power falls
• Cost of living increases

Question 26

What happens if income increases by 10%, whilst inflation also increases by 10%?

Answer 26

Purchasing power (‘in real terms’) doesn’t change

Question 27

What happens if income increases by 10%, whilst inflation increases by 8%?

Answer 27

Purchasing power increases by 2% (10%-8% = 2%)

Question 28

What is the definition of “unemployed”?

Answer 28

“People of working age in an economy who are available for work but are not in jobs and are actively looking for one”

Question 29

What is the definition of “employed”?

Answer 29

“People of working age in an economy who are working fulltime or part time”

Question 30

What is the equation used to calculate the “unemployment rate”?

Answer 30

(Unemployed people/ labor force) x 100

Question 31

What are the 4 types of unemployment?

Answer 31

1. Cyclical
2. Structural
3. Frictional
4. Seasonal

Question 32

What is “cyclical” unemployment?

Answer 32

“Demand-deficient unemployment” (caused by a downturn in the business cycle)

Question 33

What is “structural” unemployment?

Answer 33

Occurs because of a skills mismatch
–> Skill of worker =/= skills in demand

Question 34

What is “frictional” unemployment?

Answer 34

In between jobs

(eg. due to relocating)

Question 35

What is “seasonal” unemployment?

Answer 35

Unemployment due to the seasons

(eg. workers at a ski resort)

Question 36

What are some ways that structural unemployment can be drawn on a DIG?

Answer 36

1. The mismatch between demand and supply of labour
2. Minimum wage legislation
3. Labour market rigidities

Question 37

What are some examples of labour market rigidities?

Answer 37

• Minimum wage legislation (leads to wages higher than equilibrium)
• Labour union activities and wage bargaining (results in wages higher than equilibrium)
• Employment protection laws
  (makes it costly for firms to fire workers)
• Generous unemployment benefits
  (increases the attractiveness of remaining unemployed and reduces the incentive to work)

Question 38

What does the “short-run” philips curve show?

Answer 38

The inverse relationship between inflation and unemployment.

Question 39

What does the SRPC show if AD shifts outwards?

Answer 39

Will show an upward movement along the SRPC, decreasing the unemployment rate but increasing the inflation rate (demand-pull inflation)

Question 40

What do the new classical and philips curve have in common?

Answer 40

LRAS = LRPC

An economy at point A (At Yfe + NRU)
An increase in AD will cause movement from A to B in both diagrams
Workers who negotiate wage rates realize that their real wage rate has decreased after price rise from Pl1 to Pl2
Using trade unions they push for higher wages for them to continue their employment
They push for a wage rise beyond Pl2, as they have already experienced a fall in real wages and want to avoid this from happening again. the producers can not keep them without making a loss
So the SRAS shifts to the left as cost of production increases. Unemployment rates go back to NRU, but prices increase from Pl2 to Pl3. So, the economy shifts from SRPC1 to a new point outside SRPC1, Point C.
If we join the two LR points on the Philips curve, point A –> C, we will get the long run Philips curve.