Key Terms 11 - Economic Performance

Question 1

Demand Side

Answer 1

Relates to the impact of changes in aggregate demand on the economy. Associated with Keynesian economics.

Question 2

Supply Side

Answer 2

Relates to changes in the potential output of the economy, which is affected by the available factors of production, e.g. changes in the size of the labour force, and the productivity of labour.

Question 3

Trend Growth Rate

Answer 3

The rate at which output can grow, on a sustained basis, without putting upward or downward pressure on inflation. It reflects the annual average percentage increase in the productive capacity of the economy.

Question 4

Economic Cycle

Answer 4

Upswing and downswing in aggregate economic activity taking place over 4 to 12 years.

Question 5

Actual Output

Answer 5

Level of real output produced in the economy in a particular year - not to be confused with the trend level of output, which is what the economy is capable of producing when working at full capacity. Actual output differs from the trend level of output when there are output gaps.

Question 6

Output Gaps

Answer 6

Show the level of actual real output in the economy either higher or lower than the trend output level.

Question 7

Positive Output Gap

Answer 7

The level of actual real output in the economy is greater than the trend output level.

Question 8

Negative Output Gap

Answer 8

The level of actual real output in the economy is lower than the trend output level.

Question 9

Involuntary Unemployment

Answer 9

Occurs when workers are willing to work at current market wage rates but there are no jobs available.

Question 10

Voluntary Unemployment

Answer 10

Occurs when workers choose to remain unemployed and refuse job offers at current market wage rates.

Question 11

Frictional Unemployment

Answer 11

Unemployment that is usually short term and occurs when a worker switches between jobs.

Question 12

Structural Unemployment

Answer 12

Long-term unemployment occurring when some industries are declining, even though other industries may be growing. Also occurs within a growing industry if automation reduces the demand for labour, and when production requires new skills not possessed by the workers who lose their jobs. Structural unemployment is associated with the occupational and geographical immobility of labour.

Question 13

Cyclical Unemployment

Answer 13

Unemployment caused by a lack of aggregate demand in the economy, occurring when the economy goes into a recession or depression

Question 14

Deindustrialisation

Answer 14

The decline of manufacturing industries, together with coal mining.

Question 15

Seasonal Unemployment

Answer 15

Unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period.

Question 16

Real Wages

Answer 16

The purchasing power of the nominal (or money) wage; for example, real wages fall when inflation is higher than the rise in the nominal wage rate and real wages rise when the nominal wage rate increases more rapidly than inflation.

Question 17

Real-Wage Unemployment

Answer 17

Unemployment caused by real wages being stuck above the equilibrium market-clearing real wage.

Question 18

Equilibrium Unemployment

Answer 18

Exists when the economy’s aggregate labour market is in equilibrium. It is the same as the natural level of unemployment.

Question 19

Natural Rate Of Unemployment

Answer 19

The rate of unemployment when the aggregate labour market is in equilibrium.

Question 20

Demand-Pull Inflation

Answer 20

A rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right.

Question 21

Cost-Push Inflation

Answer 21

A rising price level caused by an increase in the costs of production, shown by a shift of the SRAS curve to the left.

Question 22

Quantity Theory Of Money

Answer 22

The oldest theory of inflation, which states that inflation is caused by a persistent increase in the supply of money.

Question 23

Phillips Curve

Answer 23

Based on evidence from the economy, shows the apparent relationship between the rate of inflation and the rate of unemployment. Now known as ‘the short-run Phillips curve’.