A* Terms

Question 1

Hysteresis

Answer 1

Higher unemployment can persist even after a recession ends due to workers losing skills and motivation

Question 2

Liquidity Trap

Answer 2

Interest rates are so low that monetary policy becomes ineffective, so people hoard cash instead of spending it

Question 3

Paradox of Thrift

Answer 3

If everyone saves more during a recession, AD falls, income drops so total savings may fall

Question 4

Debt Deflation Theory

Answer 4

Falling prices increase the real burden of debt so spending is cut further, worsening the recession (e.g. Major factor in 1930s Great Depression)

Question 5

Friedman’s Permanent Income Hypothesis

Answer 5

Consumption depends not just on current income but on people’s expectations of their lifetime income – SR tax cuts may not boost consumption much

Question 6

Prebisch-Singer Hypothesis

Answer 6

In LR, price of commodities falls relative to manufactured goods, worsening terms of trade for developing countries

Question 7

Automatic Stabilisers

Answer 7

Built-in features of the economy that automatically smooth out the business cycle (e.g. progressive taxes and welfare benefits)

Question 8

Dutch Disease

Answer 8

Discovery of natural resources causes a surge in a country’s currency value, making other export sectors less competitive internationally (Natural gas discovered in 1959)

Question 9

Seigniorage

Answer 9

Profit made by a government by issuing currency