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Flashcards in Topic 7 Deck (29)
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1
Q

IF EQUILIBRIUM OCCURS BELOW POTENTIAL OUTPUT
- Actual output Qe < potential output Qp
- Actual unemployment > natural unemployment
- Cyclical unemployment > 0
- The self-correcting mechanism works very slowly.
Competition for jobs –> wages fall (very slowly)
So AS shifts to the _____
May take a long time to reach potential output Qp
Cyclical unemployment persists (“stagnation”)

A

right

2
Q

Suppose the inflation rate rises –

  • the purchasing power of financial assets will _____.
  • consumers’ wealth falls in real terms
  • so consumers _____ their expenditure (C)
A

fall; reduce

3
Q

Aggregate Demand curve

In summary, if the inflation rate rises –

  • aggregate expenditure falls
  • aggregate expenditure is real GDP on the ______ side (“the quantity of real GDP demanded”)
A

demand

4
Q

Aggregate Demand curve

So there is a ___________relationship between the inflation rate and real GDP demanded.

The AD curve shows this relationship

A

downward-sloping

5
Q

Three things make aggregate demand downward-sloping ?

A
  1. Wealth effect
  2. Saving interest rate effect
  3. Exchange rate effect
6
Q

Potential GDP, or the natural rate of output, is the GDP level that would prevail if __________ (“full employment”) apply

A

normal conditions

7
Q

Aggregate Supply curve

  • If product prices in general rise, while costs of inputs (e.g. of labour, oil, etc.) are relatively steady
    + _______ increase
    + producers have to expand output
  • So there is an upward-sloping relationship between the inflation rate and real GDP supplied
    The AS curve shows this relationship
A

profits; incentive

8
Q

Shifts in AS curve

  • If real GDP supplied changes because of a change in a factor other than the inflation rate, the AS curve shifts.
  • Examples of AS shifting to the left: higher costs due to:
    + _______ increasing while product prices are steady; or
    + a rise in world oil prices while most other prices remain stable.
A

wages

9
Q

Frictional unemployment arises when people are between jobs for _________.

A

normal reasons.

10
Q

Structural unemployment is caused by shifts in the pattern of demand, or _________, such that some industries become smaller, and some skills become obsolete.

A

technological changes

11
Q

________ unemployment = structural + frictional unemployment

A

Natural

12
Q

Natural unemployment is essentially ________ over the course of the business cycle.

A

steady

13
Q

Cyclical unemployment _____ with the business cycle, that is, it depends on the state of the economy:

  • it rises when the economy is weak and
  • falls when the economy is strong.
A

varies

14
Q

_______ unemployment = natural + cyclical unemployment

A

Actual

15
Q

Starting from Qe = Qp, an ________________ (e.g. oil price increase) will shift AS to the ______–

  • Inflation rate will increase
  • while output will fall
  • so unemployment will rise

So we’ll have “stagflation”, a combination of “stagnation” and “inflation”

A

adverse supply-shock; left

16
Q

If equilibrium occurs ABOVE potential output
(Situation C)
- Actual output Qe > potential output Qp
- Actual unemployment < natural unemployment
- Cyclical unemployment < 0
- The economy has a self-correcting mechanism.
Competition for labour will drive up wages
So AS shifts to the ______(gradually)
Until Qe = Qp
Effect: ___________

A

left; inflation increases

17
Q

More likely: equilibrium occurs ____________ Qp.

A

below or above

18
Q

Unemployment results in

  • Lost _______and incomes
  • Lost ___________
A

production; human capital

19
Q

The loss of income is devastating for those who bear it. Employment benefits create _________ but don’t fully replace lost wages, and not everyone receives benefits.

A

a safety net

20
Q

Prolonged unemployment permanently damages a person’s job prospects by destroying __________.

A

human capital

21
Q

Inflation erodes the ________ of nominal wages
but often nominal wages rise just as fast as (or faster than) prices
- what is important is real wages (refer to last week’s lecture)
- Other types of income, e.g. indexed pension, real interest
==»Some people can ______ inflation (i.e. they can demand and get adequate compensation for it) but others are unable to do so

A

purchasing power; anticipate

22
Q

_________ redistributes wealth.

Unexpectedly high inflation redistributes wealth from the _______ to the ________

A

Unexpected inflation; lender (creditor); borrower (debtor)

23
Q

Many experts argue that once inflation takes hold and rises above moderate (e.g. single-digit) levels, it tends to become _________.

A

unpredictable

24
Q

There are short term ______ of real GDP around potential GDP.

A

fluctuations

25
Q

The long term trend (potential GDP) is _______.

A

rising

26
Q

Potential GDP is the quantity of real GDP produced when all the economy’s labour, capital, land, and entrepreneurial _________ are fully employed.

A

ability

27
Q

Cycical unemployment —-> ________ chair

A

not enough

28
Q

Friction unemployment —-> _____ chairs but people need to find them and they are switching chairs

A

enough

29
Q

Structural unemployment —> _______ chairs but the types of chairs do no match what people need

A

enough