Maro Semester 1 Flashcards
(159 cards)
1
Q
What is Economic Growth?
A
Economic growth is defined as the rate of change in real GDP per capita over a long period of calendar time.
2
Q
Why is real GDP used rather than nominal GDP to measure economic growth?
A
Real GDP adjusts for price changes and measures the true quantity of goods and services produced; when measured per capita, it shows living standard improvements independent of population growth.
3
Q
What does the term ‘per capita’ imply when measuring GDP?
A
It implies that GDP is divided by the total population, showing the output available for each person and accounting for population growth.
4
Q
What is Kondratieff’s long wave theory?
A
Kondratieff proposed that economies experience long waves of activity lasting around 50 years, during which advanced economies cycle between booms and recessions.
5
Q
How did Schumpeter view economic growth?
A
Schumpeter believed that innovations come in swarms and that entrepreneurial activity is essential to growth, with creative destruction driving continual renewal.
6
Q
What is Mensch’s contribution to growth theory?
A
Mensch suggested that basic innovations are most relevant to booms and depressions, emphasizing that major breakthroughs influence the cyclical dynamics of an economy.
7
Q
What are some benefits of economic growth?
A
Benefits include higher living standards, improved lifestyle, and the potential for better income distribution.
8
Q
What are negatives or costs associated with economic growth?
A
Costs include opportunity costs, personal and time distribution costs, negative externalities, and the possibility that growth may not lead to increased happiness.
9
Q
What is meant by ‘resource exhaustion’?
A
Resource exhaustion refers to the rapid acceleration in the consumption of the world’s resources, potentially outpacing the rate at which they can be replenished.
10
Q
Define ‘resource depletion’ in production processes.
A
Resource depletion means that innovations allow production with less input, though a key issue is whether such improvements will occur quickly enough to counter rapid consumption.
11
Q
What is the Aggregate Production Function (APF)?
A
The APF is a relationship that shows how aggregate output (GDP) depends on the inputs: labour (L), physical capital (K), and human capital (H), i.e., GDP = f(L,H,K).
12
Q
What is the Law of Diminishing Returns in the context of the production function?
A
It states that with all other inputs held constant, as more of one input (e.g., labour) is added, its marginal product eventually declines.
13
Q
What does ‘constant returns to scale’ mean in production?
A
It means that if all inputs are doubled, output will also double; the production function is homogeneous of degree one.
14
Q
Describe the main idea of the Classical Growth Model.
A
The classical model emphasizes the division of labour and specialization, which increases productivity and capital accumulation in the short run. However, higher incomes lead to population growth that eventually lowers per capita productivity back to a stationary state.
15
Q
According to classical thinking, why does economic growth eventually become temporary?
A
Because as incomes rise, population grows and additional workers are added, diminishing returns lower per capita output and bring the economy back to a stationary state.
16
Q
What were Adam Smith’s three prerequisites for economic growth?
A
They are: security of property, control of primogeniture, and state-provided infrastructure.
17
Q
How does Smith view the effect of extra population due to growth?
A
Smith believed that although extra population increases total output, it does not necessarily improve output per head (living standards).
18
Q
What was Malthus’s objection to unbounded population growth?
A
Malthus argued that unless population growth is checked, it will outgrow food supply, so economic growth will not necessarily translate into higher living standards.
19
Q
How do classical models differ from later models regarding production inputs?
A
Classical models typically did not incorporate human capital (H) or physical capital (K) explicitly, whereas later models include these factors to help explain differences in growth.
20
Q
What characterizes the Neoclassical Growth Model?
A
In the neoclassical model, technological progress is exogenous, the economy converges to a steady state where output per capita is constant, savings equal investment, and no further capital accumulates without technological change.
21
Q
In the steady state of the neoclassical model, how does labour growth affect output growth?
A
If labour grows at rate n, then total output grows at rate n, so that output per worker remains constant in the steady state.
22
Q
What is the steady-state relationship concerning savings, investment, and output per worker?
A
In per capita terms, savings (sY) equal the investment needed to maintain a given capital-to-labour ratio. The steady state occurs when sY = f(k), where k is capital per worker.
23
Q
Explain why a rise in the savings rate in the neoclassical model only leads to a temporary increase in the growth rate.
A
A higher savings rate increases the capital–labour ratio (K/L) temporarily, boosting output; however, due to diminishing returns, the economy eventually converges to a new steady state with growth only at the rate of labour (n).
24
Q
How does population growth affect the long-term equilibrium growth rate of output per worker?
A
An increase in population growth (n) can initially lower output per worker but in the long run, total output grows at the same rate as population, leaving per capita output unchanged in the steady state.
25
Briefly compare exogenous and endogenous growth models.
Exogenous models treat technological progress as external and given, while endogenous models generate technological change from within the economy through factors such as innovation and investment in human capital.
26
In an endogenous growth model with a linear production function y = a·k, what is the relationship between savings and growth?
With no population growth or depreciation, all saving increases the capital stock, so ?K/K = s·a, meaning the growth rate of output is directly proportionate to the savings rate.
27
What issues arise in endogenous growth models if diminishing returns to capital are assumed?
If diminishing returns exist, doubling all inputs would yield less than double output, which contradicts the idea of constant returns that would lead to increasing returns overall and potential market domination by one firm—a result not observed in reality.
28
How does human capital differ from physical capital according to Paul Romer?
Human capital consists of knowledge and skills that do not diminish with use and can be shared among many individuals, whereas physical capital cannot be used by more than one person without being depleted.
29
What is the 'location externality effect' in growth theory?
It refers to how early investments in a region build infrastructure and skills that lower subsequent production costs for later investors, although eventually the initial technical advantage may be copied.
30
According to Schumpeter, why is a monopoly market structure sometimes best for innovation?
Schumpeter argued that monopoly profits allow firms to reinvest in research and innovation, reducing average costs over time through 'learning by doing' as opposed to solely relying on pure theoretical advances.
31
How did the Asian Tigers achieve rapid growth during their development?
They grew rapidly through increases in both labour force participation (including higher female employment) and capital accumulation rather than solely relying on improvements in productivity.
32
In a Production Function Diagram, what happens when more workers are added beyond a certain point?
Initially, adding workers boosts output, but after a certain point the marginal product of labour declines and the production function eventually flattens, showing diminishing returns.
33
In a Malthus Diagram, what is 'AP' and what does it signify?
AP stands for average product per head, which declines as more workers are employed; when AP reaches a level (qs) corresponding to subsistence output, living standards are at a minimum.
34
What happens in the Malthusian model when living standards improve temporarily?
An upward shift in AP temporarily raises living standards, triggering population growth until output per capita returns to the subsistence level.
35
How does the Per Capita Production Function behave as physical capital accumulates?
It illustrates that as physical capital per worker increases, output per worker increases only up to a point due to diminishing returns.
36
What does the Solow-Swan Diagram illustrate?
It shows the steady-state equilibrium of output per worker (given by y = f(k)) where the savings-investment curve (sf(k)) crosses the break-even investment line ((n + d)k), determining the steady-state capital–labour ratio (k*).
37
In the Solow-Swan model, how is total output growth related to population growth in the steady state?
Total output grows at the same rate as the population (n), meaning that in the steady state, output per worker remains constant.
38
How does a change in the savings rate affect long-run output in the neoclassical model?
An increase in the savings rate temporarily raises output per worker by increasing the capital–labour ratio, but long-run growth remains tied to the growth rate of labour and technology.
39
What are two sources of growth in the neoclassical framework?
The two sources are changes in the savings rate (affecting capital accumulation) and increases in population (which determine the long-run growth rate of total output).
40
Define exogenous technical progress.
Exogenous technical progress is the improvement in technology that is assumed to occur at a constant rate not explained by the model, and it drives long-run growth beyond the steady state.
41
What distinguishes endogenous growth from neoclassical growth models?
Endogenous growth models explain technological progress as an outcome of decisions made within the economy (like investment in R&D or human capital), thus allowing policy actions to affect the long-run growth rate.
42
In an endogenous growth framework with a production function y = a·k, what does the equation ?K/K = s·a signify?
It signifies that with a constant savings rate, no population growth, and zero depreciation, the growth rate of capital—and thus output—is directly determined by the product of the savings rate (s) and the productivity parameter (a).
43
What potential problem arises if all firms experienced constant returns to capital in an endogenous growth model?
If constant returns were universal, it might imply increasing returns overall, potentially leading to one firm dominating the economy; however, in reality, not all benefits of capital are private, which prevents such monopolistic outcomes.
44
How does human capital contribute to sustained economic growth?
Human capital enhances technology and innovation, improves worker productivity, and produces knowledge spillovers that sustain growth—often without diminishing returns.
45
What is the 'location externality effect' in economic growth?
It is the phenomenon where early investments in a region create infrastructure and skills that lower costs for later investments, stimulating further growth.
46
According to Schumpeter, why might large firms enjoy advantages in innovation?
Large firms can finance research and development with monopoly profits and benefit from learning-by-doing, reducing average costs and accelerating technological progress.
47
How did the Asian Tigers grow their economies?
They grew primarily through increases in labour force participation and capital accumulation, rather than by relying exclusively on productivity improvements.
48
What is the purpose of the Production Function Diagram in growth theory?
It graphically represents how output changes in response to changes in input levels, illustrating diminishing marginal returns.
49
In a Malthus Diagram, what does the point where average product equals subsistence (qs) represent?
It represents the employment level at which workers produce just enough to reach subsistence; beyond this, any further population growth reduces average output per worker.
50
What lesson does the Per Capita Production Function show regarding capital accumulation?
It shows that increasing capital per worker boosts output per worker, but due to diminishing returns, the increases eventually slow down.
51
What does the Solow-Swan Diagram illustrate about the steady state?
It illustrates that the steady state is reached when the savings-investment function equals the break-even investment required to maintain the capital–labour ratio, ensuring constant output per worker.
52
How do 'sources of growth' vary between a larger workforce and improvements in output per head?
While increases in the workforce drive overall output growth, improvements in output per worker require higher capital intensity or technological advancement.
53
What does a shift upward in the savings line cause in the Solow-Swan model?
An upward shift, due to a higher savings rate, temporarily increases output per worker until a new steady state is reached, though the growth rate ultimately remains determined by population and technology.
54
Define the cost-of-living in terms of economic welfare measures.
Cost of living is the amount of income required to maintain a certain standard of living in the face of prevailing prices. Higher inflation means a higher cost-of-living.
55
How is GDP measured in monetary terms?
GDP is measured as the total value of all goods and services produced in a given period, typically based on money payments recorded with set payment terms (e.g., with or without cash discounts).
56
What is a GDP deflator, and how is it calculated?
The GDP deflator is a price index calculated as (Nominal GDP / Real GDP) × 100, used to convert nominal GDP into real GDP.
57
How is the inflation rate measured using a price index?
Inflation is measured by the percentage change in a price index from one period to the next, for example: [(P? - P???) / P???] × 100.
58
What is the difference between nominal and real interest rates?
The nominal interest rate is the stated rate, whereas the real interest rate is adjusted for inflation (real rate = nominal rate - inflation).
59
What is the typical long-term real interest rate in the UK, and how does it compare to nominal rates?
The long-term real interest rate in the UK is around 2%, while nominal rates are higher; the difference reflects the inflation rate (approximately 2%).
60
What does the Consumer Price Index (CPI) measure?
The CPI measures the overall price level of a fixed basket of goods and services typically purchased by consumers, weighted by their share in total consumer spending.
61
What are some problems associated with the CPI?
Problems include substitution bias (consumers switch to cheaper alternatives), incorporating new goods, and accounting for changes in product quality.
62
How does the GDP deflator differ from the CPI?
The GDP deflator covers prices for all domestically produced goods and services and automatically adjusts to changes in the output mix, whereas the CPI is based on a fixed basket of consumer goods.
63
What are some limitations of GDP as a measure of economic welfare?
GDP does not capture income distribution, non-market activities, environmental effects, leisure, or the hidden economy, all of which are important for assessing true welfare.
64
How do measures of domestic progress (e.g., quality-of-life indicators) differ from traditional GDP measures?
They adjust GDP to account for factors such as income distribution, environmental quality, and social well-being, but are often less timely and more subjective.
65
In the Income-Expenditure (AE) model, how is aggregate demand defined?
Aggregate demand is the total planned spending in the economy, given by AE = Consumption + Investment + Government Spending + Net Exports (C + I + G + NX).
66
How does the AE model treat the price level?
In the basic AE model, the price level is treated as fixed, but changes in price affect aggregate demand by altering real wealth and competitiveness.
67
What is the consumption function in the AE model that incorporates outside wealth?
It is expressed as C = f(Y_d, A/P), where Y_d is disposable income and A/P is the real value of net bank private sector wealth.
68
How does a change in the general price level affect real wealth and consumption?
A rise in the price level (P) reduces the real value of wealth (A/P), leading to lower consumption and a downward shift in the AE curve; a fall in P has the opposite effect.
69
What role does competitiveness play in the AE model?
Changes in the domestic price level affect the relative price of domestic versus foreign goods; lower domestic prices improve competitiveness, increasing net exports (NX) and shifting AE upward.
70
What is the multiplier effect in the context of aggregate demand?
The multiplier effect is the process by which an initial change in autonomous spending leads to a larger overall change in equilibrium GDP due to successive rounds of induced consumption.
71
How can a rise in autonomous investment (I) lead to a cumulative increase in GDP?
Through the multiplier process, an initial increase in I generates additional rounds of income and consumption until the total GDP increase is a multiple of the original change.
72
What factors determine the magnitude of the multiplier?
It depends on the marginal propensities to consume, tax rates, marginal propensity to import, and supply-side constraints (such as capacity limits).
73
What is the difference between the aggregate demand curve and a typical microeconomic demand curve?
The aggregate demand curve shows the relationship between the overall price level and total output (GDP), with both income and prices varying, unlike a micro demand curve which typically changes the price of one good while holding income constant.
74
What is the basic idea behind the AD-AS model?
The AD-AS model combines aggregate demand (the overall spending) and aggregate supply (the total output firms can produce) to determine the equilibrium price level and real GDP.
75
How are prices set in the 'Cost-Plus Pricing' approach to aggregate supply?
Firms set prices as a markup over their average costs (often dominated by wage costs); for example, P = (1+?)·W, where ? is the profit markup and W is the wage.
76
What are the advantages of a cost-plus pricing model for aggregate supply?
It reflects how many firms actually set prices based on cost plus a profit margin, thereby linking the price level directly to production costs.
77
What are the disadvantages of the simple cost-plus aggregate supply model?
It assumes constant productivity at all output levels, ignores demand influences on prices, and leads to a horizontal AS curve in (P,Y) space without linking output to price changes.
78
In micro foundations of aggregate supply, what condition must hold for profit-maximizing output?
Firms produce where marginal cost (MC) equals marginal revenue (MR); for labour, this means W/P = MPL, where MPL is the marginal product of labour.
79
How does the short-run aggregate supply (SRAS) curve differ from the long-run aggregate supply (LRAS) curve?
The SRAS curve is upward sloping due to wage and price stickiness in the short run, while the LRAS curve is vertical at the full employment (potential output) level where all prices and wages have adjusted.
80
What effect does an increase in productivity have on the AS and LRAS curves?
An increase in productivity shifts both the SRAS and LRAS curves to the right, raising output at every price level.
81
Explain the difference between Keynesian and neoclassical views regarding labour markets.
Keynesians stress wage and price rigidities that result in involuntary unemployment and demand-determined output in the short run; neoclassicals assume flexible wages and prices that clear the labour market, so unemployment is solely voluntary.
82
What does 'market clearing level of employment' (YF or Y*) refer to?
It refers to the full-employment output level where the labour market is in equilibrium and all workers willing to work at the prevailing real wage are employed.
83
Why are prices and wages often said to be 'sticky' downward in Keynesian models?
Because of long-term contracts, institutional norms, and worker resistance, wages and prices do not easily fall even when aggregate demand decreases, delaying economic adjustments.
84
How does the AD-AS model explain real-world shocks such as the 1970s oil price shocks or the Global Financial Crisis?
Shocks shift either the AS (e.g., production cost increases from oil shocks) or AD (e.g., collapse in investment during the financial crisis) curves, leading to changes in output and the price level that reflect recessionary or inflationary gaps.
85
What are demand shocks, and how do they affect the AD curve?
Demand shocks are sudden changes in components of aggregate demand (like consumption or investment) that shift the AD curve: positive shocks shift it right, and negative shocks shift it left.
86
What are supply shocks, and how do they affect the AS curve?
Supply shocks are sudden changes in production costs or capacity (e.g., oil price hikes) that shift the AS curve; negative supply shocks shift AS left (raising prices and lowering output).
87
Describe one policy response to an oil shock as seen in the 1970s.
Some policymakers increased aggregate demand to protect employment (even though it raised inflation), while others prioritized curbing inflation, accepting higher unemployment.
88
How did the EMS (Exchange Rate Mechanism) crisis affect the UK economy?
Joining the ERM at an overvalued exchange rate created a negative aggregate demand shock and recession, eventually leading to a 14% devaluation that restored demand and initiated a period of moderate growth.
89
Summarize the economic effects of the Global Financial Crisis (2008–9).
The crisis led to credit contraction, bank insolvencies, and large negative demand shocks that collapsed investment and output, which then required massive central bank interventions and bailouts.
90
What were the economic impacts of the Covid-19 crisis?
Covid-19 caused a huge negative supply shock (disrupting labour supply) alongside a collapse in demand; government measures like lockdowns and furlough schemes mitigated income loss but led to long-term fiscal challenges and potential shifts in long-run capacity.
91
What is the definition of unemployment according to standard measures?
Unemployment is when a person who is able and willing to work cannot find a job.
92
Name three primary methods for measuring unemployment.
Labour Force Surveys, the Claimant Count, and the ILO survey-based unemployment measure.
93
What is the 'Claimant Count' measure of unemployment?
It counts the number of individuals claiming unemployment-related benefits at employment service offices, although it may undercount or double-count some cases.
94
How does the ILO Unemployment Measure differ from the Claimant Count?
The ILO measure is survey-based and includes all those reporting they are unemployed, generally resulting in a higher unemployment rate than the Claimant Count.
95
What is meant by 'long-term unemployment'?
Long-term unemployment refers to individuals who have been unemployed for an extended period, typically more than one year.
96
How does skill level affect unemployment rates?
Low-skilled workers are 4–5 times more likely to be unemployed compared to skilled workers, with manual workers making up a large share of the unemployed.
97
What is the labour force participation rate?
It is the percentage of the working-age population that is either employed or actively looking for work.
98
What are the three main ways an individual can be considered unemployed?
They are job loss (redundancy), temporary layoffs (with an expectation of recall), and voluntary quits.
99
What does the Beveridge Curve represent?
It plots vacancies against unemployment to illustrate the efficiency with which jobs are filled. Points along the 45° line indicate voluntary unemployment, while points above indicate additional involuntary unemployment.
100
According to the Beveridge Curve, what does an outward shift indicate?
An outward shift indicates worsening matching efficiency in the labour market, due to factors like skill mismatches or increased labour force participation.
101
How does the 'replacement rate' affect unemployment?
A higher replacement rate (generous unemployment benefits relative to wages) can encourage longer unemployment durations and potentially raise the natural rate of unemployment.
102
What is meant by the 'tax wedge' in the labour market?
The tax wedge is the difference between the gross wage paid by employers and the net wage received by employees after taxes, which can discourage labour supply and increase voluntary unemployment.
103
What are the main social and economic costs of unemployment?
Costs include lower disposable income, de-skilling, higher public expenditure on health and welfare, lost output for the economy, increased income inequality, and potential long-term social unrest.
104
What is the unemployment gap?
It is the difference between the actual unemployment rate and the equilibrium (natural) rate of unemployment, primarily reflecting cyclical (involuntary) unemployment.
105
What does 'hysteresis' in unemployment refer to?
Hysteresis means that periods of high unemployment can become self-perpetuating as skills erode and workers become discouraged, resulting in a permanently higher natural rate of unemployment.
106
What policy solutions are generally recommended for involuntary (cyclical) unemployment?
Expansionary fiscal and monetary policies to boost aggregate demand are typically recommended to reduce cyclical unemployment.
107
What distinguishes equilibrium (voluntary) unemployment from cyclical (involuntary) unemployment?
Equilibrium unemployment stems from normal labour market turnover and structural factors, while cyclical unemployment results from insufficient aggregate demand.
108
What is the accelerator model in the context of business cycles?
It links changes in investment to changes in GDP, with the idea that if capital is proportional to output (K = ?Y), then a change in GDP (?Y) induces a proportional change in investment (?K = ??Y), amplifying fluctuations.
109
How does Samuelson’s multiplier–accelerator model combine with the multiplier effect?
Samuelson’s model uses a consumption function and an investment function (dependent on changes in consumption) to form a second-order difference equation for GDP: Y? = a(1 + b)Y??? – abY??? + G?, where 'a' is the marginal propensity to consume and 'b' is the accelerator coefficient.
110
What determines whether cyclical fluctuations in GDP are damped or explosive in the multiplier–accelerator model?
The values of the marginal propensity to consume (a) and the accelerator coefficient (b) determine the dynamics; moderate values lead to damped cycles, whereas very high accelerator values can lead to explosive or unstable cycles.
111
What role does the 'availability of funds' play in business cycles?
During recessions, firms have limited funds from retained earnings and borrowing, constraining investment; as the economy recovers, these funding constraints ease, thereby boosting investment.
112
How do business expectations influence the business cycle?
Positive expectations can lead to increased investment and higher GDP (amplifying booms), while negative expectations can reduce investment and trigger downturns, creating self-reinforcing cycles.
113
What are 'floors' and 'ceilings' in the context of business cycles?
Floors are the lower bounds of GDP maintained by mechanisms such as unemployment benefits and household borrowing, while ceilings are limits imposed by capacity constraints in production.
114
What types of events can trigger turning points in the business cycle?
Turning points can be triggered by sudden shocks (financial crises, oil price spikes, political events) or gradual shifts in economic fundamentals, as measured by indicators like those used by the NBER.
115
What does 'anatomy of a financial boom and bust' refer to?
It describes the pattern where credit expansion, optimism, and technological or policy changes fuel a boom, followed by a bust when asset bubbles burst and credit contracts rapidly.
116
Summarize Hyman Minsky’s view on financial instability.
Minsky argued that long periods of stability lead to overconfidence, excessive risk-taking, and eventually a collapse when the bubble bursts, emphasizing the inherent instability of modern financial systems.
117
What is one key conclusion regarding business cycles from these models?
No single unifying model exists; however, most cycles involve fluctuations in aggregate demand and investment, with financial factors playing an important role alongside real economic activity.
118
Define Unemployment as used in these measures.
Unemployment is defined as the situation in which an individual who is able and willing to work is unable to find a job.
119
What are the three main measurement methods for unemployment?
They are: Labour Force Surveys (using ILO definitions), the Claimant Count (counting those claiming benefits), and the ILO survey-based measure (counting those who report being unemployed).
120
What is the Claimant Count method?
It measures unemployment by counting the number of individuals claiming unemployment benefits at employment service offices, though it may miss non-claimants and possibly double count some cases.
121
How does the ILO Unemployment Measure work and what is one drawback?
It uses survey data to count all individuals who report being unemployed; a drawback is that it may classify individuals with very short work hours as employed, possibly overestimating unemployment compared to other methods.
122
What is 'long-term unemployment'?
Long-term unemployment refers to those who have been unemployed for more than one year, with percentages varying significantly between countries.
123
How does skill level affect unemployment rates?
Low-skilled workers face significantly higher unemployment rates—often 4–5 times higher—than those with higher skills.
124
What is the labour force participation rate?
It is the percentage of the working-age population that is either employed or actively seeking employment.
125
List the three main ways an individual can be considered unemployed.
They are experiencing job loss (due to layoffs or redundancy), being temporarily laid off (with the expectation of recall), or having voluntarily quit without an immediate reemployment prospect.
126
What does a labour market 'flow' diagram show?
It shows the transitions of individuals between employment, unemployment, and non-participation in the labour force over a period.
127
What purpose does the Model of the Labour Market serve?
It depicts labour supply (LF) and demand (LD) along with the job acceptance (AJ) schedule to help analyze both structural (equilibrium) and cyclical (demand-induced) unemployment.
128
How is equilibrium (or natural) unemployment determined?
It occurs when the number of workers willing to work at the equilibrium real wage equals the number of jobs available, and typically includes frictional and structural unemployment but not cyclical unemployment.
129
How does classical unemployment occur in the labour market?
It arises when wages are held above the market-clearing level (for example, due to strong union bargaining), leading to involuntary unemployment for some workers even though, collectively, the excess unemployment is considered voluntary.
130
Distinguish between voluntary and involuntary unemployment, particularly in the Keynesian view.
Voluntary (equilibrium) unemployment is due to normal labour market frictions, while involuntary (cyclical) unemployment occurs when aggregate demand is too low to provide jobs at current wages.
131
What is the 'unemployment gap'?
The unemployment gap is the difference between the actual unemployment rate and the equilibrium (natural) rate, typically highlighting involuntary unemployment.
132
What is the purpose of the Beveridge Curve?
It plots job vacancies against unemployment, illustrating the efficiency of the matching process in the labour market. It helps differentiate between voluntary and involuntary unemployment.
133
What factors can cause an outward shift in the Beveridge Curve?
An outward shift can be caused by inefficient matching due to skill mismatches, higher labour force participation, long-term unemployment, or economic uncertainty.
134
How does a higher replacement rate affect the labour market?
A higher replacement rate (more generous unemployment benefits) can discourage reemployment, increasing equilibrium unemployment levels as workers may remain jobless longer.
135
What is the 'tax wedge' and how does it influence unemployment?
The tax wedge is the difference between the gross wage and the net wage (after taxes), reducing work incentives and potentially increasing voluntary unemployment.
136
What are the main social and economic costs of unemployment?
They include reduced income and skills for individuals, higher healthcare and social service costs, lost economic output, increased inequality, and potential long-term social instability.
137
Define hysteresis in the context of unemployment.
Hysteresis is the idea that high unemployment can have lasting, self-reinforcing effects on the labour market, increasing the natural rate of unemployment over time due to skill erosion and discouragement.
138
How does hysteresis affect the Beveridge Curve?
It shifts the curve outward, indicating that high unemployment has a persistent negative effect on how efficiently vacancies are filled.
139
What policy is recommended to address involuntary (cyclical) unemployment?
Expansionary fiscal and monetary policies boost aggregate demand and help restore employment during recessions.
140
When the economy has only voluntary (equilibrium) unemployment, what policy type is best for reducing unemployment?
Supply-side policies—such as reducing distortions like high tax wedges or excessive union wage demands—are needed to improve labour market efficiency.
141
What are the phases of the business cycle?
The phases include Trough, Recovery, Peak, and Recession, with unemployment rising during downturns and falling during recoveries.
142
What is the primary cause of GDP fluctuations in trade (business) cycles?
Fluctuations in aggregate demand (especially investment, which is volatile) are the primary drivers of business cycle fluctuations.
143
Explain the multiplier effect in the context of business cycles.
An initial change in autonomous spending (like an increase in investment) triggers additional rounds of spending, multiplying the overall change in GDP.
144
What is the accelerator model, and how does it relate investment to GDP changes?
The accelerator model states that if capital is proportional to output (K = ?Y), then any change in GDP (?Y) results in a proportional change in investment (?K = ?·?Y), amplifying the effects of changes in demand.
145
Briefly state Samuelson’s multiplier–accelerator model’s key equation.
Samuelson’s model is given by Y? = a(1 + b)Y??? – abY??? + G?, where 'a' is the marginal propensity to consume and 'b' is the accelerator coefficient.
146
Under what conditions in the multiplier–accelerator model do cycles become damped versus explosive?
Moderate values of the parameters (e.g., a = 0.6, b = 1.5) produce damped, stable cycles; if b is too high (e.g., b = 2.0), cycles can become explosive and unstable.
147
How does 'availability of funds' influence business cycles?
During recessions, reduced retained earnings and credit availability limit investment; as the cycle recovers, easing of these constraints supports an upswing in investment.
148
What role do business expectations play in driving business cycles?
Expectations about future demand influence investment decisions; optimistic expectations can fuel booms, while pessimism can trigger downturns.
149
What are 'floors' and 'ceilings' in the context of business cycles?
Floors are the lower boundaries on GDP maintained by stabilizers like savings and social benefits, while ceilings are limits imposed by capacity constraints that eventually slow expansion.
150
What types of events can trigger turning points in business cycles?
Turning points may be triggered by sudden shocks (like a financial crash or oil price spike) or gradual changes in economic fundamentals and sentiment.
151
What does 'anatomy of a financial boom and bust' refer to?
It describes the pattern where prolonged economic booms—often driven by credit expansion and optimism—are followed by busts when asset bubbles burst and credit tightens.
152
Summarize Hyman Minsky’s insight on financial instability.
Minsky argued that prolonged stability leads to excessive risk-taking and overconfidence, eventually causing financial instability and crises when the bubble bursts.
153
What is one key conclusion regarding business cycles from these models?
Although there is no single unifying model, common elements include the role of aggregate demand, investment cycles, financial factors, and the fact that cycles have both real and financial dimensions.
154
What broad distinctions separate the Keynesian and Neoclassical approaches regarding labour markets and aggregate supply?
Keynesians emphasize wage and price rigidity that leads to involuntary unemployment and demand-determined output in the short run; neoclassicals assume flexible wages that clear the labour market, resulting only in voluntary unemployment and output at full employment.
155
What is the role of policy in stabilizing business cycles according to these models?
Policy primarily targets aggregate demand via fiscal and monetary measures during downturns, while supply-side policies may be used to reduce structural distortions in the labour market.
156
What does 'supply-side crowding out' mean in the context of the multiplier effect?
It means that when increased aggregate expenditure raises prices, higher production costs or capacity constraints reduce the responsiveness of output to further spending, thereby decreasing the effective multiplier.
157
How do 'floors and ceilings' function as natural limits in the business cycle?
Floors (like unemployment benefits and household borrowing) prevent GDP from falling too low, while ceilings (like production capacity limits) slow expansion and eventually force a reversal in the business cycle.
158
What lessons can be drawn from the 'Anatomy of a Financial Boom and Bust' in business cycles?
Booms are often driven by excessive optimism and credit expansion, which later reverse when assets are revalued and credit contracts, leading to sharp downturns.
159
What does the 'hysteresis' concept in unemployment imply for long-run labour market outcomes?
It implies that high unemployment rates, if prolonged, can permanently raise the natural unemployment rate due to skill erosion, discouraged worker effects, and market
