Growth, Unemployment and Inflation

Question 1

Short run growth

Answer 1

• The percentage increase in a countries real GDP, measured annually
• Caused by increases in AD

Question 2

Long run growth

Answer 2

• The increase to an economies productive capacity
• Caused by increases in AS

Question 3

Potential output

Answer 3

What an economy could produce if resources were fully employed

Question 4

Output gap

Answer 4

When there is a difference between the actual level of output and the potential level of output

Question 5

Negative output gap

Answer 5

When the level of output is less than the potential level of output

Question 6

Business cycle

Answer 6

The stage of economic growth that an economy is in

Question 7

Positive output gap

Answer 7

When the actual level of output is greater than the potential level of output

Question 8

Boom

Answer 8

• High rates of economic growth
• Near full capacity/Positive output gaps
• Near full employment
• Demand-pull inflation
• High levels of confidence leading to high levels of investment
• Improving government budgets

Question 9

Recession

Answer 9

• Negative economic growth
• Lots of spare capacity/Negative output gaps
• Demand-deficient unemployment
• Low demand-pull inflation
• Low levels of confidence leading to reduced investment
• Worsening government budgets

Question 10

Costs of growth to consumers

Answer 10

• Economic growth may exacerbate inequalities
• Higher levels of demand-pull inflation
• More shoe leather cost (more time and effort on finding deals)
• The law of diminishing returns suggests that further consumption has limited benefits

Question 11

Benefits of growth to consumers

Answer 11

• Incomes increase and unemployment decreased
• Increased confidence leads to higher levels of consumption and living standards

Question 12

Costs of growth to firms

Answer 12

Firms face higher menu costs as they need to ensure they keep changing their prices to meet inflation

Question 13

Benefits of growth for firms

Answer 13

• Higher levels of business confidence will lead to greater investment
• Increased confidence investment may lead to new technologies that improve productivity
• Firms can grow and take advantage of the benefits of economies of scale
• Growth in export markets may increase competition, but give firms more sales opportunities

Question 14

Costs of growth to the government

Answer 14

• Governments may need to increase healthcare spending if the consumption of demerit goods increases
• They need to ensure that the economy does not overheat

Question 15

Benefits of growth for the government

Answer 15

The budget will improve as welfare spending decreases and tax receipts increase

Question 16

Costs of growth to future living standards

Answer 16

High levels of growth could lead to damage to the environment, reducing the resources available to future generations

Question 17

Benefits of growth to future living standards

Answer 17

• As incomes increase people are more able to care about the environment
• Growth may lead to the development of green technology
• Public services can be better funded, improving quality of life and life expectancy

Question 18

Cyclical instability

Answer 18

Fluctuations in the economic cycle caused by the recurring cycles of booms and busts

Question 19

Causes of cyclical instability

Answer 19

• Sustainability of economic growth
• Excessive growth in debt
• Asset price bubbles
• Destabilising speculation/animal spirits
• Herding

Question 20

Measures of unemployment

Answer 20

• The claimant count
• The labour force survey (LFS)

Question 21

The claimant count

Answer 21

• The number of people claiming unemployment benefits like JSA
• Not everyone who is unemployed can, or bothers to, claim JSA

Question 22

The labour force survey

Answer 22

The LFS asks people if they:
- Have been out of work for 4 weeks
- Able and willing to work within 2 weeks
- Workers should be available for at least 1 hour a week
The LFS produces higher numbers

Question 23

Voluntary unemployment

Answer 23

When someone chooses not to work at the current wage rate

Question 24

Involuntary unemployment

Answer 24

They are willing and able to find work at the current wage rate, but cannot find work

Question 25

Effect of unemployment on consumers

Answer 25

- Consumers have less disposable income so standards of living will fall - They are psychological consequences

Question 26

Effect of unemployment on firms

Answer 26

- Firms have a larger supply of labour, causing wages to fall - Consumer spending may fall, possibly increasing unemployment as firms cut costs

Question 27

Effect of unemployment on workers

Answer 27

- The government must spend more on JSA - The government will receive less tax revenue

Question 28

Structural unemployment

Answer 28

- A long term decline in demand for an industry - It is worsened by geographical and occupational immobilities of labour as workers cannot easily find new jobs

Question 29

Technological unemployment

Answer 29

A form of structural unemployment where labour is replaced with capital

Question 30

Frictional unemployment

Answer 30

- The time between leaving a job and looking for another one - It is extremely common and is the reason it is rare to get 100% employment - It is not damaging as it is temporary

Question 31

Demand-deficient unemployment

Answer 31

- Caused by a lack of demand for goods and services - Occurs during periods of poor economic activity

Question 32

Real wage unemployment

Answer 32

- Wages above the market equilibrium may cause unemployment as the supply of labour exceeds demand - Classical economists argue that if wages fall to the equilibrium level there would be no unemployment

Question 33

Natural rate of unemployment

Answer 33

- The unemployment rate when the labour market is at equilibrium - The difference between those willing to have a job at the current market wage level, and those who are willing and able to have a job - It includes frictional and structural unemployment

Question 34

Inflation

Answer 34

The sustained rise in the general price level over time

Question 35

Effect of inflation

Answer 35

- The cost of living increases - The purchasing power of money decreases

Question 36

Deflation

Answer 36

The sustained fall in the general price level over time (negative inflation rate)

Question 37

Disinflation

Answer 37

- The falling rate of inflation - Where the average price level is still rising, just to a slower extent

Question 38

Demand-pull inflation

Answer 38

- Where AD increases faster than LRAS, leading to a rise in the price level - Too much money is chasing too few goods

Question 39

Cost-push inflation

Answer 39

When firms cost of production rises, causing SRAS to shift left

Question 40

Causes of demand-pull inflation

Answer 40

- Depreciation in the exchange rate (making imports more expensive and exports cheaper) - Expansionary fiscal policy - Expansionary monetary policy - Growth in UK export markets

Question 41

Causes of cost-push inflation

Answer 41

- Changes in world commodity prices - Increasing cost of labour - Expectations of inflation - Indirect taxes - Depreciation in the exchange rate, making imports more expensive

Question 42

Effect of inflation on consumers

Answer 42

- Those on low and fixed incomes are hit hardest due to inflation's regressive effect - The real value of debt decreases

Question 43

Effect of inflation on firms

Answer 43

- Reduced firms as the government is likely to increase interest rates, increasing the cost of borrowing - Workers demand higher wages, increasing costs of production - Firms may become uncompetitively globally

Question 44

Effect of inflation on the government

Answer 44

The government will have to increase welfare spending to account for rising cost of living

Question 45

Effect of deflation

Answer 45

- Consumers are discouraged from spending as goods/services are cheaper tomorrow - The real value of debt increases - Consumers have less disposable income so spending falls