Lecture for Thurs 26 August

Question 1

If we produce more than potential output, what can this lead to?

Answer 1

inflation

Question 2

If we produce less than potential output, what can this lead to?

Answer 2

unemployment

Question 3

What is on each axis of the graph showing the growth trend line/potential output/normal output?

Answer 3

x axis: time

y axis: real GDP

Question 4

What is the shape of the growth trend line/potential output/normal output line?

Answer 4

this is linear and increases ie. as time goes on, real GDP increases

Question 5

What does the growth trend line/potential output/normal output line show?

Answer 5

This shows the level of output that an economy can produce substantially over time. It is the estimate of the levels of output but what it actually produces can be more or less than this.

Question 6

What is a recession (market contraction)?

Answer 6

This is when the economy is growing at a rate lower than normal so we are producing output less than potential output

Question 7

What is an expansion (market recovery)?

Answer 7

This is when the economy is growing at a rate higher than normal so we are producing output more than potential output

Question 8

What is a peak?

Answer 8

This is the high point prior to downturn or the beginning of a recession

Question 9

What is a trough?

Answer 9

This is the end of the recession or low point prior to the expansion

Question 10

What rises an output falls?

Answer 10

unemployment

Question 11

Changes in real GDP are inversely related to what?

Answer 11

the unemployment rate

Question 12

During times of ________, unemployment _________ substantially

Answer 12

recession

rises

Question 13

While output can ________ without changes in the __________ level, in most cases _______ fluctuations and __________ fluctuations occur together

Answer 13

fluctuate
unemployment
output
unemployment

Question 14

What is potential output?

Answer 14

This is the full employment output ie. the normal rate of output

Question 15

What is the natural rate of unemployment?

Answer 15

This is the full employment level of unemployment

Question 16

What is the symbol for potential output?

Answer 16

Y*

Question 17

What are three other names for potential output?

Answer 17

• potential real GDP
• full-employment output
• normal output

Question 18

Define potential output

Answer 18

This is the amount of output (real GDP) that an economy can sustainably produce when using its resources, such as capital and labour, at normal rates; ie. if all resources are employed optimally (not over or under utilised), for a given level of technology

Question 19

What is the symbol for actual output?

Answer 19

Y

Question 20

Does actual output always equal potential output?

Answer 20

no

Question 21

Actual output equals what?

Answer 21

real GDP (squiggly line whereas potential output is the straight line)

Question 22

Potential output, Y* is a function of what?

What is the equation for this function? What do each of these components mean?

Answer 22

level of technology (A), capital (K), labour resources (L)
Y* = AF (K, L) where
A = level of technology
K* = capital used at the full employment level at normal rates
L* = labour resources used at the full employment level at normal rates

Question 23

How can we calculate the output gap?

Answer 23

actual output (Y) - potential output (Y*)

Question 24

What happens during a recessionary gap?

Answer 24

Y* > Y

ie. potential output is greater than the potential output
ie. Y - Y* is negative

Question 25

What happens during an expansionary gap?

Answer 25

Y > Y* ie. actual output is greater than the potential output ie. Y - Y* is positive

Question 26

What are two problems with a recessionary gaps?

Answer 26

- capital and labour resources are not fully utilised | - output and employment are below normal levels

Question 27

One of the issues with a recessionary gap is the capital and labour resources are not fully utilised. Expand on this

Answer 27

There is higher than normal levels of unemployment and there is wasted and under-utilised resources

Question 28

One of the issues with a recessionary gap is the output and employment are below normal levels. Expand on this

Answer 28

This means that you are not producing at potential and therefore unemployment increases

Question 29

What are three problems with the expansionary gaps?

Answer 29

- higher output and employment than normal - demand for goods exceed the capacity to produce them at normal rates and prices rise - high inflation reduces economic efficiency

Question 30

Why is it an issue that there is higher output and employment than normal during an expansion?

Answer 30

Because this could indicate than the economy overheats and it could lead to inflation.

Question 31

When you are producing potential output, you are using your resources at what rates?

Answer 31

normal rates

Question 32

What is the only way to produce more than potential output?

Answer 32

to use resources at more than normal rates

Question 33

What happens to the labour resources when you are producing a higher output level than potential?

Answer 33

To produce higher level of output than potential, you have to overwork the workers and this means that they will want to be paid more. This increases costs which is passed onto consumers in higher prices which leads to inflation

Question 34

What happens to the capital resources when you are producing a higher output level than potential?

Answer 34

To produce higher level of output than potential, you have to be using the machines more than normal which is over-working the machines. This can cause it to break down so you have to pay for repairs more frequently so this adds to costs which causes higher prices for consumers and this leads to inflation

Question 35

What is the symbol for full employment?

Answer 35

u*

Question 36

What is another name for full employment?

Answer 36

natural rate of unemployment

Question 37

Define full employment

Answer 37

This is the rate of unemployment when the economy is producing its potential output ie. the level of unemployment that the economy can handle and still produce potential output

Question 38

Does full employment means that unemployment is zero?

Answer 38

no

Question 39

Does actual unemployment (u) always equal the natural rate of unemployment (u*)?

Answer 39

no

Question 40

What is the role of Treasury?

Answer 40

They estimate the natural rate of unemployment ie. they estimate the rate of unemployment that the NZ economy can handle and still be expected to produce at natural rates of unemployment

Question 41

The natural rate of unemployment is unemployment that does not go away on its own, even in the _________ run

Answer 41

long

Question 42

Define natural rate of unemployment

Answer 42

This is the amount of unemployment that the economy normally experiences when we are producing an output equal to potential output

Question 43

What are the three types of unemployment?

Answer 43

- frictional - structural - cyclical

Question 44

Define frictional unemployment

Answer 44

This is when there is a mismatch between jobs and workers in the short term ie. workers are searching for a new job and are temporarily unemployed in the meantime

Question 45

Define structural unemployment?

Answer 45

This is when there is a mismatch between jobs and workers in the long term due to a skills mismatch: the skills that some workers have differ from those that the employers need

Question 46

Define cyclical unemployment

Answer 46

This is associated with the short term ups and downs of the business cycle: it refers to the year-to-year fluctuations in unemployment around its natural rate there might be fewer jobs when there is a recession

Question 47

When in a recession, what types of unemployment do you expect?

Answer 47

frictional cyclical strutural

Question 48

When in an expansion, what types of unemployment do you expect?

Answer 48

frictional | structural

Question 49

What is the total (actual) unemployment (u)?

Answer 49

F + S + C | actual unemployment unemployment

Question 50

What is the natural rate of unemployment (u*)?

Answer 50

This is frictional + structural because cyclical = 0 | This is the unemployment an economy has when producing potential output (Y*)

Question 51

How can we calculate cyclical unemployment?

Answer 51

total unemployment - natural rate | u - u*

Question 52

What three things occur at the natural rate of unemployment?

Answer 52

1. there is no recessionary or expansionary gap 2. actual output is equal to potential output 3. we are at full employment