Unit 3 AOS2a - Chapter 2: Macroeconomics: output, employment and income in the Australian economy Flashcards

Question

Explain lagging indicators of economic activity.

Answer 1

Lagging indicators show changes in economic activity some time after the event has occurred because they take time to respond. Therefore they only tells the readers previous levels of economic activity and do not tell us what the economy is doing right now. GDP is an example of a lagging indicator of economic activity because it typically takes 3 months for the ABS to collect, process and release quarterly statistics. Other lagging indicators of changing levels of economic activity include unemployment rates, CPI or inflation rates and changes in average weekly earnings.

Answer 2

Coincident indicators move very closely with actual changes in the level of economic activity. They are regularly published in short intervals and more or less tell us what is happening right now. Here we think of monthly changes in retail sales. For example, monthly changes in retail prices.

Answer 3

Leading indicators predict, in advance, where the economy is heading in the near future. While not completely reliable, they often forecast a change in activity before it actually occurs. Examples of indicators in this category include the business confidence index, new housing approvals, monthly index of consumer sentiment and changes in economic activity among our major trading partners.

Answer 4

1. Long-term trend patterns 2. Cyclical patterns 3. Seasonal patterns 4. Erratic patterns

Answer 5

If over a 10-year or longer period of time, the average direction of an indicator graph of economic activity is rising (despite some erratic short-term swings), it is often possible to talk of a long-term trend in the data. For instance, such a trend is evident if we look at Australia’s overall level of economic activity in the 73 years between 1940 and 2013. (Or 76 years between 1940 and 2016?)

Answer 6

When statistics are plotted over a period of time and follow a fairly regular, wave-like arrangement where there are peaks and troughs, the pattern is regarded as cyclical. This is the normal behaviour of economic activity (GDP), unemployment, inflation and the current account deficit (CAD).

Answer 7

Some statistical indicators of economic activity move in a similar direction during the same month(s) each year. This is typical of seasonal patterns and applies to some types of unemployment. For example, seasonal unemployment is higher in December, January and February each year due to school leavers looking for employment; sales of snow- boards and skis are up in June, surfboards in December and soft drinks in January.

Answer 8

Sometimes, there is no real pattern in the statistics for economic activity because they are reacting to once-off or erratic events. These events include the sudden rise in the demand for hotel beds during Melbourne’s Commonwealth Games in 2006, the drop in air travel and tourism following the September 11 terrorist attacks in the US, the effects of the prolonged drought from 2002–10 on GDP, or the floods experienced in 2011 and 2013.

Answer 9

The circular flow model of an economy illustrates how the Australian economy works and how its different parts are interrelated. Additionally, it identifies some of the macroeconomic variables affecting our country’s economic conditions. The model consists of five sectors and four flows.

Answer 10

1. The household sector* 2. The business sector* 3. The financial sector 4. The government sector 5. The overseas sector If S+T+M > I+G+X then circular flow of incomes decreases. (Savings + Taxes + Import spending > Investment spending + Government spending + Export spending) * = 2 main parts to model

Answer 11

The household sector comprises all members of the population. . Some members supply or sell their resources (natural, labour and capital resources) to business firms = flow 1 . and use the money received to demand or buy finished goods and services from businesses that help to satisfy their needs and wants = flow 3

Answer 12

. The business sector purchases or demands resources from households = flow 2 . which are then converted into finished goods and services = flow 3 Firms supply or sell these final goods and services to the household sector. This means that Australian households and businesses both operate as buyers (demanders) and sellers (suppliers) of goods and services.

Answer 13

This is made up of the many types of financial institutions including banks, building societies, the stock exchange, credit unions and finance companies. . All these organisations borrow household savings (‘S’) = leakage . and lend these savings to creditworthy customers who use the money to finance their investment spending and business expansion (‘I’) = injection

Answer 14

. Governments collect revenue from taxation (‘T’) and other sources = leakage . and use this revenue to pay for government spending (‘G’) and other outlays that help to provide collective goods and services (public hospitals and schools) for use by society = injection

Answer 15

. Each year Australia buys imports from abroad to help satisfy our wants (‘M’) = leakage . and we also sell exports to people living overseas (‘X’) = injection

Answer 16

Connecting the main household and business sectors are four flows or streams whose value is measured in money terms ($) over a period of time such as a year. Two of these flows relate to the demand side of the economy and two relate to the supply side. Flow no.1 - the supply of resources Flow no.2 - total incomes or the demand for resources Flow no.3 - total expenditure or aggregate demand Flow no.4 - the flow of final goods and services supplied (GDP)

Answer 17

Perhaps a starting point for economic activity is when the household sector supplies, or makes avail- able, resources for use by the business sector.

Answer 18

Here, the business sector purchases or demands resources by paying different types of incomes to the household sector. For instance: . individuals selling labour are paid wages and salaries . those lending money capital are rewarded with interest . and allowing firms to use property helps owners gain income in the form of rent Logically, the money value of all incomes paid to households (flow no. 2) will equal exactly the money value of all the resources sold (flow no. 1).

Answer 19

Upon receiving income, the household sector will then dispose of it in different ways. This influences the total money value of spending on Australian-made goods and services which is called aggregate demand (AD). Some income ends up as leakages that lower AD, while some income results in injections that increase total spending.

Answer 20

Economic activity is usually measured by Gross Domestic Product (GDP) and includes all production of goods and services in a given time period. 🔹This production can be a result of actions from individuals, firms and governments. 🔹Economic activity is mainly the process of converting scarce resources into goods and services designed to help satisfy society's needs and wants.

Answer 21

Most household income is spent on private consumption of goods and services such as food and entertainment (‘C’). Income spent as ‘C’ re-enters the circular flow as part of AD.

Answer 22

Some income is directed into savings in the financial sector. In themselves, savings (‘S’) are a leakage because they lower the level of ‘C’. However, the financial sector may inject ‘S’ back into the model by lending them to business firms wanting finance to expand their private investment spending (‘I’). This involves the purchase of plant and equipment and, being an injection, ‘I’ helps to lift the level of AD.

Answer 23

Another part of household income is devoted to paying government taxes. These, too, are classed as a leakage from the model because they lower the level of ‘C’. But again, money taken out through taxation may re-enter the circular flow if it is used to pay for government consumption and investment spending (‘G’). ‘G’ is, therefore, an injection into AD designed to help provide the community with collective goods and services, such as public roads or defence.

Answer 24

Some household income leaks out of the Australian economy as spending on imports (‘M’). Sometimes this leakage is partially or fully replaced by overseas spending on our nation’s exports (‘X’). Here, ‘X’ is regarded as an injection or addition to the level of AD. In summary, flow no. 3 represents the total value of expenditure on Australian-made goods and services. This is called AD and it consists of C + I + G + X − M. The reason for subtracting M at this point is to exclude spending on imported goods and services, so that what remains is only the value of expenditure on Australian-made items. So far we have seen that the level of AD is influenced by the total value of leakages (made up of S + T + M) relative to the total value of injections (made up of I + G + X). If there was a rise in leakages relative to injections, AD would fall. However, if there was a fall in leakages against a rise in injections, there would be an increase in AD or expenditure on Australian-made goods and services.

Answer 25

Flow no. 4 is the total value (in $) of finished goods and services produced or supplied by the business sector over a period of time. This flow reflects the overall level of Australian economic activity and is commonly measured by gross domestic product (GDP).

Answer 26

The level of aggregate demand and the level of aggregate supply.

Answer 27

GDP or economic activity (flow no. 4) depends on AD (that is, flow no. 3 or total annual value of expenditure on Australian-made goods and services made up of C+I+G+X−M). In turn, AD is also affected by the total value of leakages (S + T + M) relative to the total value of injections (I + G + X). AD (C + I + G + X − M) = GDP and the short-term cyclical level of economic activity, hence, in terms of the ups and downs of the business cycle, an increase in leakages relative to injections will see a drop in AD. This usually causes a contraction or slowdown in the level of economic activity. If this fall in activity is severe, there may even be a recession or depression. By contrast, a fall in leakages relative to injections will result in a rise in AD. As a consequence, there will be an expansion in the level of economic activity, possibly ending in an inflationary boom if the economy is already operating close to its productive capacity.

Answer 28

Despite the great importance of AD in determining the current level of economic activity in an economy, aggregate supply-related factors in our circular flow model also affect the economy’s speed limit or potential rate of economic growth. Over a number of years, the economy’s productive capacity or potential for supplying goods and services normally grows. The total or aggregate supply (AS) of goods and services that a nation can potentially produce is especially affected by the availability of a nation’s resources and the efficiency with which these are used. This is one reason why the long-term or average trendline shown on the business cycle diagram slopes upward and to the right, at around 3.25 per cent per year in Australia’s case.

Answer 29

AD represents the total spending on all goods and services in the economy in a given year. As a macroeconomic variable, it consists of expenditure from different sources including: . private consumption spending by households (C) . private investment spending by businesses (I) . consumption spending by governments (G1) . investment spending by governments (G2) . and net overseas expenditure made up of spending on our exports (X) from abroad minus spending on imports (M) by local residents. These are the components of the AD equation

Answer 30

AD = C + I + G1 + G2 + (X - M)

Answer 31

. Rising AD causes economic activity to expand . Slowing AD causes economic activity to contract . AD can create 'ideal' conditions of domestic economic stability

Answer 32

When AD and its components grow strongly firms generally see growing sales, lengthening orders and falling stocks of unsold goods and services. Businesses respond by expanding their levels of production or output supplied, as long as unemployed resources or unused productive capacity are available. When most firms are able to achieve this, the result is an expansion in the level of economic activity. However, if there is no unused productive capacity, rising AD results in widespread shortages of goods and services. This causes generally rising prices or demand inflation, typically found in booms.

Answer 33

By contrast, when AD and its components decline firms notice generally falling sales, the absence of orders, and rising stocks of unsold goods and services. Businesses are then forced to cut their output supplied to prevent further overproduction. If most firms do this, a general slowdown in the level of economic activity occurs, possibly ending in a recession or depression if this contraction was severe. Additionally, the slowdown would cause higher unemployment and possibly lower inflation, if most firms cut prices to help clear their excess stocks.

Answer 34

The level of economic activity is ideal only when the level of AD is neither excessive, causing an inflationary boom, nor insufficient, causing unemployment and recession. Here, the economy could experience the benefits of domestic economic stability. Armed with this knowledge, governments use various policies, such as changes in taxes, government spending and interest rates, to try to stabilise the level of AD to reduce economic instability.

Answer 35

``` . Private Consumption (C) . Private Investment (I) . Government Consumption (G1) . Government Investment (G2) . Net Exports (X-M) ``` They respond to demand-side factors

Answer 36

This includes household expenditure designed to help satisfy our immediate needs and wants for durable and single use goods as well as services. It represents 60% of AD and is susceptible to the influence of aggregate demand-side factors.

Answer 37

This involves private business spending on physical, plant, manufactured materials and equipment used to make other other goods and services. It's levels are quite unstable and actually causes economic instability. It's growth also responds to aggregate demand-side factors. This expenditure not only helps raise our nation’s productive capacity and make poss- ible the production of other goods and services, but it should also improve the efficiency of labour and natural resources.

Answer 38

This is government/public expenditure on goods and services used to help satisfy the community's needs and wants. It includes spending on staff wages for government departments. In recent years, G1 has averaged around 17 per cent of AD

Answer 39

This incorporates public expenditure on capital equipment (infrastructure) such as buildings, roads and railways. It is used to help satisfy societies wants, expand Australia's productive capacity and improve the efficiency of other resources. It represents only about 3% of AD and its level changes as a consequence of macro- economic demand-side factors.

Answer 40

This represents the balance or difference between foreign spending on Australian goods and services (exports) minus our spending on foreign goods and services (imports). As a proportion of AD, X and M, each represents about 18 to 24 per cent.

Answer 41

. Consumer confidence (C & M) . Business confidence (I & M) . Economic activity overseas among our trading partners (X & I) . Household disposable income (C & M) . The exchange rate (X & M) . The terms of trade index (X & M) . Credit growth (C, I & M) . A country's population growth rate (C, G1, G2, & M) . Budgetary policy (C, I, G1, G2, X & M) . Interest rates (C, I, X & M)

Answer 42

This describes household expectations regarding future income, employment and inflation. The confidence of consumers effects the decision of households. High confidence results in more spending on local or foreign-made goods and services, whilst low confidence results in households saving their income. ⬆️ Consumer Confidence = ⬆️ Private/Household Consumption + ⬆️ Import spending = ⬆️ AD And vice versa

Answer 43

This describes business expectations regarding future sales and profit and therefore effects future investment. Business confidence affects business investment spending on plant and equipment. Optimistic firms expect higher future sales and profits and therefore lift "I" in new plant and equipment in order to expand their productive capacity. Here, their spending tends to accelerate AD and economic activity. By contrast, the reverse occurs if general business pessimism sets in. Can also effect import spending

Answer 44

This describes economic activity overseas especially for our key trading partners. This factor alters their demand for our "X" of locally made commodities, services and manufactured goods, and may possibly influence foreign "I". After a time lag, a downturn in activity overseas usually means weaker X sales and AD in Australia, thereby slowing domestic economic activity. However, the reverse applies if activity abroad rises.

Answer 45

This refers to the money available for spending by individuals after tax us laid and/or benefits are received. This affects household "C" of local and foreign-made goods and services. ⬆ disposable income = ️⬆️️ in "C" and "M" And vice versa And vice versa

Answer 46

This describes the value of the Australia dollar when swapped for foreign currencies. An appreciation means an ⬆️ in $AUD value compared to say $USD = ⬆️ M and ⬇️ X = ⬆️ AD A depreciation mean a ⬆️ in $AUD value compared to $USD = ⬇️ M ⬆️ X = ️️️️ ⬆️ AD

Answer 47

This describes the price out our exports compared to the price of imports. When terms of trade increases (favourable) it means our export prices are relatively higher than our import prices. ⬆️ T.o.T = ⬆️(X-M) = ⬆️ AD

Answer 48

Credit growth influences the volume of household and business finance available for purchasing consumer and capital goods, through borrowing from the financial sector. It therefore greatly effects consumer and household borrowing. ⬆️ rate of credit growth = ⬆️ C, ⬆️ I and ⬆️ M = ⬆️ AD And vice versa

Answer 49

A country’s population growth rate is influenced by both the net natural increase in population (births minus deaths) and by net migration (immigration minus emigration). In turn, this will especially alter expenditure on C, G and M. Overall, an acceleration in population growth rate, tends to lift AD, while a fall tends to slow AD and economic activity.

Answer 50

Budgetary policy relates to annual changes in expected government receipts and outlays. Clearly, tax rates, outlays on welfare or industry assistance for exporters and government spending on education or foreign defence purchases can all help change expenditure on C, I, G, X and M. For instance, a budget surplus where receipts exceed outlays generally tends to slow AD and economic activity, relative to a budget deficit where outlays exceed receipts.

Answer 51

Changes in interest rates by the Reserve Bank of Australia (RBA) are part of monetary policy. As a government policy, interest rates can change expenditure on C and I items purchased using borrowed money. In addition, rates can also alter the levels of credit used to finance the production of future X or credit-based spending on M. ⬆️ interest rates tends to slow C and I = weakened domestic AD and economic activity And vice versa

Answer 52

Consumer confidence describes the level of household optimism or pessimism about future employment prospects and income. This affects the levels of saving and consumption spending. Business confidence relates to the level of optimism or pessimism by a firm about its future sales and profits. It affects the level of business investment spending.

Answer 53

Disposable income is spendable income after receiving government income support and paying personal income tax. Exchange rate is the price or value of our currency when swapped for other currencies. Terms of trade represent the ratio of general prices received for our exports relative to the general prices we pay for imports.

Answer 54

Aggregate supply is the total annual quantity of all finished goods and services produced by every business in the Australian economy. It represents the sum of the quantity of goods and services supplied by all types of firms operating in various markets scattered across the country. Aggregate supply can be affected by a large number of factors, each of which can be graded under three broad categories. These categories include Availability, Cost and Efficiency (ACE).

Answer 55

In the short and medium terms, a nation’s overall level of economic activity largely reflects variations in AD and changing demand-side conditions. However, in the long term it is impossible to increase the level of economic activity and production in a country simply by spending more and more. The economy soon hits its productive capacity or limit for aggregate supply (AS). When this point is reached, further increases in the aggregate volume of goods and services supplied depend on an overall increase in a nation’s ‘ability’ or ‘motivation’ to produce.

Answer 56

Aggregate supply-side factors are the main determinants of a nation’s long-term productive capacity or potential level of GDP (for example, quantity and productivity of resources), affecting the volume and/or efficiency of resources.

Answer 57

They equal lowered production costs, higher profitability levels for firms, and increased worker productivity. This means firms are more able and motivated to produce. Equals increase in nations productive capacity or AS and higher potential and sustainable levels of economic activity.

Answer 58

If less favourable aggregate supply-side conditions develop generally in an economy and cause productive capacity to shrink, AS must also decline. This reduces our potential or sustainable level of economic activity, even if there is a sufficient level of AD to warrant higher production.

Answer 59

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Answer 60

``` . Resources availability and efficiency . Growth in business profit levels . Business bankruptcy rates . Real unit labour costs (RULCs) . Legal minimum wages . Federal workplace wage agreements . Interest rates . Productivity . The exchange rate . Strike levels . Labour force participation rates . Aggregate hours worked . The rate of net migration . Price of materials used in manufacturing . State and local government charges . Government aggregate supply-side policies ```

Answer 61

The quantity of resources available and how efficiently they are used affects a nation’s long-term productive capacity or potential supply of goods and services. Extra resources (natural, capital and labour) used productively make it feasible for a nation to shift its current production possibility frontier outwards, thus growing the level of productive capacity. Eg. Discovery of minerals or technology, or effective education and training (improves labour force), implementation of tariff reduction. ⬆️ A and ⬆️ E = ⬆️ AS

Answer 62

Growth in business profit levels (total sales revenue minus production costs) affects business survival, AS and economic activity. Without good profits as a favourable supply-side factor, firms will not invest in new plant and equipment to increase Australia’s productive capacity or supply. ⬆️ business profits (attracts more business) = ⬆️ availability = ⬆️ AS

Answer 63

Business bankruptcy rates refer to business closures due to a lack of profitability. This influences the nation’s productive capacity or supply, as well as levels of unemployment. High bankruptcy rates tend to slow domestic economic activity as uncompetitive firms close down. ⬇️ bankruptcy rates (more firms) = more products produced = ⬆️ availability = ⬆️ AS

Answer 64

Real unit labour costs (RULCs) represent the average level of wages and ‘on costs’ per unit of output produced compared with trends in average prices received by businesses for output sold. ⬇️ RULCs = ⬇️ costs = ⬆️ AS

Answer 65

With the decrease of the legal minimum working age comes the growth of the labour force (more labour inputs). Increased availability and decreased costs (cost less to hire minors)

Answer 66

Federal workplace wage agreements result in various pay rises agreed on a firm-by-firm basis. While these wage outcomes may have a demand-side effect and influence spending, they can also be regarded as a production cost affecting business profits and AS. Rises in average wages under enterprise agreements tend to have an adverse supply-side effect on productive capacity and AS, and the potential rate of economic activity, unless they are accompanied and offset by efficiency rises. Therefore workplace agreements that favour businesses = decreased costs = AS

Answer 67

Interest rates represent the cost or price of credit expressed as a percentage. Interests can be both demand and supply-side factors. Higher rates are seen as unfavourable because they make businesses less competitive, weaken profits, cause closures and thus reduce AS. By contrast, cheaper interest rates are a favourable supply-side factor that improve business conditions, boost AS and accelerate the potential rate of economic activity.

Answer 68

Total number of outputs in comparison to inputs. Productivity measures the efficiency or output gained from a certain quantity of productive inputs. GDP per hour worked is a measure of labour productivity. Worker or labour productivity is commonly indicated by the change in GDP per hour worked. Productivity has a dramatic impact on a nation’s productive capacity and the supply of goods and services. When efficiency rises as a favourable supply-side factor, costs per unit of output are reduced and profits tend to rise. This makes producers keener and more able to increase AS and economic activity. However, falling profitability as an unfavourable supply-side factor weakens business condition and cuts AS.

Answer 69

The exchange rate is the price of the Australian dollar measured in terms of other currencies used in international trade. (This too can be seen as an aggregate demand-side factor because it affects X, M and AD). However, it is also an aggregate supply-side factor because rises and falls in the dollar alter the production costs of local firms using imported equipment and materials. This has an impact on profits and the willingness and ability of companies to supply goods and services. A depreciation (fall) of the Australian dollar is an unfavourable supply-side condition because it tends to make the cost of imported equipment dearer, so firms find it harder to be competitive and make a profit = AS is reduced and economic activity slows. A stronger dollar is seen as favourable for Australian dollar (although on the demand side the rise is possibly unfavourable since it weakens AD).

Answer 70

Strike levels are one measure of worker industrial unrest. They interrupt the supply of labour and the production of goods and services, especially if their coverage is national. Higher strike levels are seen as an unfavourable supply-side condition. They make firms less able to produce, erode profitability and reduce AS and economic activity. By contrast, much lower strike levels are seen as a favourable supply-side development that help lift productive capacity and AS.

Answer 71

Labour force participation rates refer to the proportion of the population aged over 15 years who are members of the labour force (that is, they are either employed or unemployed). Rising participation rates can mean that the size of the workforce is larger and there is more labour available. This extra supply of labour resources is a favourable condition because it helps to expand productive capacity, increase AS and lift the potential level of economic activity.

Answer 72

The annual percentage change in aggregate hours worked affects the amount of labour resources available for production. If people work longer hours (perhaps through overtime, taking a second job, or moving into full-time employment), this should help grow the nation’s productive capacity, increase AS and lift the sustainable rate of economic growth.

Answer 73

The rate of net migration to Australia also affects the size and skills of Australia’s labour force. It equals the rate of immigration - the rate of emigration. It helps to increase the quantity and efficiency of labour resources and should help to increase productive capacity or AS, and the sustainable rate of economic growth.

Answer 74

Prices of materials used in manufacture can include both local and imported inputs. These materials could be raw materials, semi-processed or finished goods. Since firms need to purchase these to undertake production, such prices are regarded as a production cost and, hence, a supply-side factor. A rise in the cost of these materials is an unfavourable development because it may depress profit levels and therefore makes firms less willing and able to produce competitively. AS and the potential rate of economic activity are lifted if the cost of materials as a supply-side factor falls.

Answer 75

State and local government charges (eg. for electricity, water and other utilities) are a supply-side factor since they affect a firm’s production costs and profits. Higher charges are an unfavourable condition. They slow AS because they erode the ability and willingness of businesses to produce and may lead to business closures. By contrast, if these charges are kept low, supply-side conditions become more favourable, leading to increased productive capacity and AS.

Answer 76

Government aggregate supply-side policies are cost cutting, efficiency-promoting reforms such as deregulation of the labour market and trade liberalisation including tariff cuts, some supply-side aspects of budgetary policy such as large national infrastructure projects and lower tax rates, and immigration policies. These measures can have a substantial beneficial impact on business efficiency, production costs, profits, business expansion and closures, resource allocation, productive capacity, employment, incomes and living standards.

Answer 77

Productivity measures the efficiency or output gained from a certain quantity of productive inputs. GDP per hour worked is a measure of labour productivity. The participation rate is the proportion of people aged 15 and over who are members of the labour force.

Answer 78

The aggregate demand–supply diagram is used to illustrate the key sets of influences or factors affecting spending and productive capacity on an economy’s equilibrium level of GDP or economic activity.

Answer 79

``` . Resource availability and efficiency . Rate of net migration . Business profits . Bankruptcy rates . Legal minimum working age . Labour force participation rate . Strike levels . Aggregate hours worked ```

Answer 80

``` . Workplace agreements . Interest rates . Real unit labour costs . Legal minimum working age . Price of materials . Exchange rates . State and local government fee taxes . Government supply policies ```

Answer 81

. Resource availability and efficiency | . Strike levels

Answer 82

Generally stronger demand-side conditions means that buyers are prepared to purchase larger quantities of local products at all given price levels. This means that the whole AD line shifts up and to the right (an increase in total expenditure from AD1 to AD2). However, nationally weaker demand-side conditions move the whole AD line down and to the left (a decrease in total expenditure from AD1 to AD0).

Answer 83

. The horizontal section of the AS line exists at low levels of national output or supply, where there is plenty of unused productive capacity. In this area, firms would find it very easy to increase their production levels in response to little or no rise in the general level of prices. . The upper or vertical zone of the AS line is where there is generally no unused productive capacity. Here, real national production is at its physical limit because all resources are fully employed. Even large rises in the general price level and the offer of huge profits are not enough for an actual increase in the volume of national production. This is simply because firms cannot get hold of the extra resources that they would require to further lift GDP. . Between these extremes, there is the intermediate zone on the AS line located at the elbow where the line starts to bend upwards. This corner section indicates the gradual onset of full employment where the little excess capacity remaining soon gives way to no unused capacity at all. Moving upwards into this zone, bigger and bigger general price rises are needed to make extra production profitable.

Answer 84

The onset of generally more favourable supply-side conditions that improve national productive capacity, cause the AS line to increase or move outwards from AS1 to AS2. Here, most firms become more willing and able than previously to lift supply. By contrast, generally less favourable supply-side conditions result in a decrease in the AS line that shifts inwards from AS1 to AS0. Producers are less willing and able to produce, and capacity is cut.

Unit 3 AOS2a - Chapter 2: Macroeconomics: output, employment and income in the Australian economy Flashcards

(108 cards)