Chapter 11

Question 1

Draw short and long run economic growth

Answer 1

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Question 2

Define demand side

Answer 2

Impact of changes in aggregate demand on the economy

Question 3

Draw short run economic growth portrayed by rightward shifts of AD

Answer 3

…

Question 4

Define supply side

Answer 4

Changes in potential output of the economy

Question 5

Example of supply side

Answer 5

Change in decreasing wages, resulting in more supply

Question 6

Define trend growth rate

Answer 6

Long run growth rate, output can grow on a sustained basis without putting upward or downward pressure on inflation(annual average percentage)

Question 7

Define economic cycle

Answer 7

Upswing and downswing in aggregate economic activity

Question 8

What causes short run economic growth

Answer 8

Increase in AD (demand side)

Question 9

What causes long run economic growth

Answer 9

Supply side of , increase in factors of production

Question 10

Costs of economic growth

Answer 10

• Uses up finite resources
• Leads to pollution
• Destroy cultures and communities
• Urbanisation
• Rapid growth in pop leads to more mouths to feed

Question 11

Benefits of economic growth

Answer 11

• increases standards of living
• Increase people’s life expectancy/
• virtuous cycle (business confidence such as)

Question 12

Does economic growth increase international competitiveness

Answer 12

Yes

Question 13

Draw an economic cycle

Answer 13

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Question 14

What is actual output

Answer 14

Round the trend like which is the real level of output produced by an economy

Question 15

Cause of changes in phases of economic cycle

Answer 15

-Fluctuations of AD (Demand side factors)
-Supply side factors
-Outside shocks
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Question 16

Two main ways of changes in economic activity

Answer 16

• seasonal (by seasons)

- cyclical (years)

Question 17

What else apart from GDP can be used to measure phases of the economic cycle

Answer 17

-employment

Question 18

Define positive and negative output gap

Answer 18

Positive output gap- level of actual real output greater than trend
Negative output gap- level of actual real output lower than trend

Question 19

Show peak and trough

Question 20

Draw the negative and positive output gaps on an AD AS diagram

Answer 20

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Question 21

Difference voluntary and involuntary unemployment

Answer 21

Voluntary -by choice

Involuntary- Not by choice

Question 22

Types of unemployment and define

Answer 22

Frictional- between jobs
Cyclical- demand deficient
Structural- Such as robots
Seasonal- due to seasons changing

Question 23

Define deindustrialisation

Answer 23

Decline of manufacturing industries

Question 24

What was Keynesian unemployment

Answer 24

Cyclical unemployment lack of demand due to under full employment equilibrium due to ineffective AD

Question 25

What is real wage unemployment

Answer 25

Unemployment caused by real wages being stuck above equilibrium market clearing real wage. Too much demand too little supply due to high wage

Question 26

Why might wage be unable to go down

Answer 26

Due to trade ujions

Question 27

What is the natural rate of unemployment

Answer 27

When aggregate labour market is in equilibrium. | Frictional and structural make this up. natural rate

Question 28

Draw natural level of unemployment

Answer 28

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Question 29

Consequences of unemployment

Answer 29

- Reduces international competitiveness - Higher taxation - Black economy

Question 30

Gov policies to reduce unemployment

Answer 30

- Improve ability to job search - Job seekers allowance - Supply side policies

Question 31

Explain demand pull inflation

Answer 31

Rising price level caused by increase in AD

Question 32

Draw demand pull inflation

Answer 32

…

Question 33

Explain cost push inflation

Answer 33

Rising price level caused by increase in the cost of production

Question 34

Draw cost push production

Answer 34

…

Question 35

Why must governments be able to correctly diagnose cause or causes of unemployment

Answer 35

To reduce it

Question 36

What do monetarists believe in regard to inflation

Answer 36

Inflation is caused by an increase of money supply

Question 37

What is the quantity theory of money

Answer 37

Oldest inflation theory that inflation is caused by increase of money

Question 38

What happens if people expect inflation to increase

Answer 38

They spend more now, actually causing this inflation to occur

Question 39

What happens if people expect inflation to fall

Answer 39

They spend less so this does occur

Question 40

Disadvantages of inflation

Answer 40

- Distortion of economic behaviour - Extreme cases there is a breakdown in the functions of money - Reduced competitiveness internationally

Question 41

Two types of deflation and draw

Answer 41

Benign- improvements in economies supply side | Malignant- Collapse in AD

Question 42

What happens to inflation and unemployment when there is a positive output gap negative output gap

Answer 42

Positive- increase and fall | Negative- Decrease and rise

Question 43

What is the short run philips curve and draw it

Answer 43

Relationship between rate of inflation and unemployment

Question 44

What is the LR philips curve and explain it

Answer 44

It is at the natural rate of unemployment ,impossible to reduce it below this level, without causing hyperinflation

Question 45

What is the correct way of reducing unemployment below its natural rate

Answer 45

Any supply side policies