Economic Performance

Question 1

What happens if there is a negative output gap

Answer 1

interest rates rise

Question 2

what is most likely to reduce negative output gap

Answer 2

rise in exchange rate

Question 3

what happens when you increase interest rates when exchange rate are rising

Answer 3

increases level of unemployment

Question 4

what will lead to the bank of England lowering interest rates?

Answer 4

• negative output gap
• rising exchange rate
• inflation below target

Question 5

short run economic growth

Answer 5

• comes from increased use of previously unemployed resources
• result in an increase in overall output

Question 6

determinants of short run growth

Answer 6

1. increase in AD

2. Increase in SRAS

Question 7

long run economic growth

Answer 7

• comes from an increase in LRAS

- growth based on increasing the potential output level of the economy

Question 8

determinants of long run economic growth

Answer 8

• improvements in quantity or quality of FoP
  1) increasing labour force
  2) improvements in labour productivity
  3) capital investment
  4) new technology

Question 9

Benefits of economic growth

Answer 9

• higher living standards
• easier to find jobs
• increased tax revenue
• greater international status for the government

Question 10

costs of economic growth

Answer 10

• increased inflation if short run growth rise too quicklu
• depletion of natural resources
• increased negative externalities

Question 11

boom

Answer 11

period of above average short run economic growth

• low unemployment
• inflation rising
• current account deficit

Question 12

downturn

Answer 12

period where short run economic growth falls from above average to below average

• unemployment stops falling
• inflation stops rising
• current account moves towards surplus

Question 13

recession

Answer 13

two successive quarters of a year where short run economic growth is negative

• unemployment rises
• inflation falls
• current account moves into surplus

Question 14

recovery

Answer 14

short run economic growth starts to increase after a recession

• inflation remains low
• unemployment stops rising

Question 15

Negative output gap

Answer 15

• actual growth below trend growth
• cyclical unemployment likely to increase
• Econ growth below productive capacity

Question 16

What is negative output gap caused by

Answer 16

low AD

Question 17

how to reduce negative output gap

Answer 17

increase AD

Question 18

Positive output gap

Answer 18

• actual growth above trend growth
• leads to inflation
• to keep output high, costs rise inflationary pressures

Question 19

How to reduce positive output gap?

Answer 19

reduce AD

Question 20

cyclical unemployment

Answer 20

caused by insufficient AD

- if spending on output is low, workers producing that output won’t be required

Question 21

Frictional unemployment

Answer 21

caused by movements into and out of the job market ie occurs when people are between jobs

Question 22

how to reduce frictional unemployment

Answer 22

improvements in helping people find out what job vacancies are available

Question 23

structural unemployment

Answer 23

caused by mismatched between the labour supply available and the labour demand for differently skilled labour
- also caused by advancements in technology

Question 24

voluntary unemployment

Answer 24

where people are unwilling to accept a job at the going wage rate despite there being jobs available (frictional)

Question 25

involuntary unemployment

Answer 25

where people are unable to find unemployment at current market wage rate (cyclical)

Question 26

real wage unemployment

Answer 26

occurs when the real wage is above the market equilibrium wage rate in the labour market

Question 27

deflation

Answer 27

a fall in the average level of price over time

Question 28

disinflation

Answer 28

where the rate of inflation falls but is still positive

Question 29

Demand pull inflation

Answer 29

- caused by excessively high levels of AD - high levels of spending gives signals to firms increase output - higher spending = firms increase prices due to high costs for producing more output - when economy operating LRAS,m increase in AD leads to inflation

Question 30

how to reduce demand pull inflation

Answer 30

decrease AD

Question 31

Cost push inflation

Answer 31

- caused by a rise in costs of production | - higher prices and falling output

Question 32

consequences of inflation

Answer 32

- uncompetitive exports - search costs - uncertainty - policy response

Question 33

search costs

Answer 33

individual spend more time researching goods (comparing prices)

Question 34

uncertainty

Answer 34

businesses cautious in production or expansion

Question 35

policy response

Answer 35

gov implement deflationary policies (eg higher interest rates)

Question 36

consequences of deflation

Answer 36

- delays in consumption (people wait until goods are cheaper | - rising real value of debt (falls in prices, falls in income