4.2.3 Economic Performance

Question 1

Short run growth

Answer 1

The percentage increase in a country’s real GDP, measured annually (increase in AS)

Question 2

Long run growth

Answer 2

When the productive capacity of the economy increases and refers to the trend rate of growth of national output over time (increase in AS)

Question 3

Positive output gap

Answer 3

When actual growth is greater than trend growth (boom)

Question 4

Negative output gap

Answer 4

When actual growth is below trend growth (bust)

Question 5

How can output gaps be shown using an AD AS diagram

Answer 5

Draw LRAS SRAS and show shifts in AD, an outward shift shows a positive output gap and an inward shift a negative output gap

Question 6

Pros of economic growth for consumers

Answer 6

• average consumer income increases

* consumers feel more confident which leads to more consumption and better living standards

Question 7

Cons of economic growth for consumers

Answer 7

• can cause inequality
• higher demand pull inflation
• more effort spent trying to find the best deal (shoe leather costs)
• benefits of consumption don’t last (law of finishing returns)

Question 8

Pros of economic growth for government

Answer 8

•government budget may improve as there is higher taxes

Question 9

Cons of economic growth for government

Answer 9

Might increase spending on healthcare if demerit goods are consumed

Question 10

Costs of economic growth for firms

Answer 10

Menu costs as a result of inflation

Question 11

Benefits of economic growth to firms

Answer 11

• more profit leads to more investment
• improved technology and lower costs In long run
• growth leads to economies of scale
• more competition makes them more efficient and more sales opportunities

Question 12

Costs of economic growth for living standards

Answer 12

•could damage the environment due to increase in negative externalities

Question 13

Benefits of economic growth for living standards

Answer 13

• could lead to greener technology
• consumer have more goods and services of a higher quality
• public services improve

Question 14

Causes of cyclical instability

Answer 14

• unsustainable growth
• excessive growth in credit and levels of debt
• asset price bubbles- when investors panic sell stocks
• destabilising speculation
• herding- people copying economic agents

Question 15

Different types of unemployment

Answer 15

• structural
• frictional
• seasonal
• cyclical
• real wage
• technological

Question 16

Structural unemployment

Answer 16

Long term decline in demand for the goods in an industry, which cost jobs (coal miners)

Question 17

Frictional unemployment

Answer 17

Time between leaving one job and looking for another

Question 18

Seasonal unemployment

Answer 18

Jobs depending on the season (ice cream man)

Question 19

Cyclical unemployment

Answer 19

Lack of demand for goods and services, usually in a recession

Question 20

Real wage unemployment

Answer 20

Wages above the market equilibrium may cause unemployment because supply of labour exceeds demand

Question 21

Technological unemployment

Answer 21

When people are replaced by machines

Question 22

Consequences of unemployment

Answer 22

• standard of living may fall
• psychological consequences of losing a job
• firms have more people to employ so wages fall
• firms lose profit due to lowered consumption
• more unemployment benefits given out

Question 23

Natural rate of unemployment

Answer 23

The difference between those willing to have a job at current market wage level and those willing and able to.

Question 24

Non- accelerating inflation rate of inflation

Answer 24

Inflation doesn’t have a tendency to increase at this unemployment rate.

Question 25

Inflation

Answer 25

The sustained rise in general price levels over time

Question 26

Deflation

Answer 26

The sustained fall in general price levels over time

Question 27

Disinflation

Answer 27

When inflation is still rising but at a slower rate

Question 28

Demand pull inflation

Answer 28

When AD is growing unsustainably there is pressure on resources. Producers therefore raise prices

Question 29

Triggers for demand pull inflation

Answer 29

* depreciation in exchange rate (X-M) increases AD * fiscal stimulus in the form of lower taxes or more government spending * lower interest rates

Question 30

Cost push inflation

Answer 30

When firms face rising costs

Question 31

Triggers for cost push inflation

Answer 31

* increase in commodity prices * labour becomes more expensive * indirect taxes * depreciation in exchange rate, imports become more expensive * monopolies exploit consumers

Question 32

Effects of inflation on consumers

Answer 32

* those on low fixed incomes are hit hardest due to its regressive affect * if consumers have loans the value of repayment is less * savings are worth less

Question 33

Effects of inflation on firms

Answer 33

* likely to be high interest rates so investment drops * workers might demand higher wages * firms may be less price competitive on a global scale * unpredictable inflation will reduce business confidence

Question 34

Effects of inflation on the government

Answer 34

•will have to increase the value of the state pension and welfare payments because the cost of living is increasing

Question 35

Effects of inflation on workers

Answer 35

* real incomes fall so they have less disposable income | * could be redundancies as firms try to cut their costs

Question 36

When has the UK experienced deflation

Answer 36

In April 2015 prices fell by 0.1%

Question 37

Effects of deflation

Answer 37

* lower consumption as they wait to buy goods * increasing unemployment * makes value of debt greater * wages are likely to fall since firms make lower profits * even less consumption of the real interest rate increases (interest rates- deflation rate)

Question 38

Quantity theory of money

Answer 38

Stated that there is inflation if the money supply increases at a faster rate than national income MV=PQ ``` M= money supply V= velocity of circulation P= the price level Q= real GDP ```

Question 39

Explain how the quantity theory of money works

Answer 39

* It is argued that V is constant in the short run and Q is independent on money supply * when money supply is increased consumers spend more money which causes outward shift in AD * this firms a positive output gap which is inflationary * as a result more workers are employed so wages increase and so do costs, firms make up for this by putting up prices * the real value of money falls and so there is a contraction in demand * workers demand higher wages due to inflation which causes a leftward shift in SRAS * output is back to equilibrium but price level is higher

Question 40

What is true of a positive output gap?

Answer 40

* AD is increasing faster than AS * inflationary * actual level of output is greater than potential level of output

Question 41

What is true of a negative output gap?

Answer 41

* AS is greater than AD * deflationary * actual growth is less than potential

Question 42

Explain the Phillips curve (short run)

Answer 42

* as economic growth increases, unemployment falls | * wages increase and so does consumption leading to an increase in average price level

Question 43

How can the trade off between inflation and unemployment be limited

Answer 43

Through supply side policies to reduce structural unemployment which won’t increase average wages