Economic Performance Flashcards

Question

What is the Long Run Phillips Curve (LRPC) and how is it shifted?

Answer 1

A completely inelastic curve that shows that in the long run, the economy will always return to a natural rate of unemployment. It is shifted by: - **Changes in labour market flexibility** - **Changes in skills/human capital** - **Demographic changes** - **Policy changes that affect work incentives, such as:** *More generous in-work benefits/lower marginal tax rates* *Changes in unemployment benefits without strong job-search conditions* *Changes in migration* *Expanding sectors with easy retraining (LRPC left)* *Declining sectors with hard-to-transfer skills (LRPC right)* *Deindustrialisation*

Answer 2

- Falling prices may impact **consumer confidence** - Consumers may hold on to money today in order to spend their money tomorrow when prices are cheaper - This fall in consumption would cause a fall in AD, a fall in economic growth and a further fall in prices. - This could cause a *'deflationary spiral'*

Answer 3

- GDP Increasing - Unemployment Decreasing - Inflation Increasing - Consumer + Business confidence Increasing

Answer 4

The difference between the actual level of output and the trend/potential level of output. Negative OG: Actual > Potential Positive OG: Actual < Potential

Answer 5

How quickly you can convert an asset into cash

Answer 6

**Inflation** is the sustained rise in the general price level over time. This means the cost of living increases and the purchasing power of money decreases. **Deflation** is the opposite, where the average price level in the economy falls. There is a negative inflation rate. **Disinflation** is the falling rate of inflation. This is when the average price level is still rising, but to a slower extent. The price of goods and services are STILL increasing, but at a slower rate than before. The purchasing power is still falling, it is just falling MORE slowly.

Answer 7

There are two lines: **Actual GDP** (the real GDP of a country) and **Trend GDP** (the level of output that an economy can produce at a constant inflation rate) The **Actual GDP** is curved (Like this: ഗ) Showing peaks (BOOM's in the economy) and troughs (SLUMP's in the economy. Positive gradient points are called recoveries/economic growth, and negative gradient points are called recessions. The Trend GDP is a straight, low gradient, upwards sloping line.

Answer 8

- GDP Low - Unemployment High - Inflation Low - Consumer + Business confidence LOW

Answer 9

**Consumers** - Delay spending - Reduced confidence - Falling real incomes (if wages fall) **Producers** - Falling revenue - Reduced profits - Possible layoffs **Government** - Lower tax revenues - Higher welfare spending - Risk of deflationary spiral **Society** - Higher unemployment - Slower growth - Rising real debt burden

Answer 10

Short Run / actual economic growth occurs due to an increase in AD or SRAS. Could be caused by: - Decrease in I.R. - Decrease in E.R - Decrease in Income Tax - Decrease in wage rate - Decrease in VAT - Increase in E.R (imported raw materials) Long Run / potential economic growth occurs due to an increase in LRAS Could be caused by: - Better training of workers - Increased immigration - Technological advancements

Answer 11

To achieve **susainable economic growth** This is economic growth that enables people to meet their needs today but does not stop future generatios from also meeting their need This occurs when AD + LRAS increases at the same rate

Answer 12

**Consumers** - Increased purchasing power - Increase in real income - Increased Q.o.L - Increased quality of goods - Wealth Effect **Producers** - Increased profit margins, leading to an investment rise, causing an increase in AD and therefore GDP. - LRAS and capital productivity rises, therefore there is higher innovation in the market. - Improved competitiveness **Society** - Lower unemployment and reduced inequality - Greater choice of products - More growth could leas to environmental damage - Stronger long-run growth **Workers** - Higher wages - Better working conditions - Higher productivity - Lower demand/unemployment **Government** - Spending decreases (on benefits) - Tax revenue increases, therefore the government deficity decreases resulting in a more balanced budget. - Improved fiscal position (how much the government can borrow or tax)

Answer 13

- Low inflation - For a few people, it may give them time to search for a more rewarding job - It makes it easier for expanding firms to recruit workers - Workers may not ask for higher wages, can help to keep costs lower for firms, keeping prices lower

Answer 14

A person is involuntarily unemployed when they are willing and able to work at the current wage rate, but they cannot find work. When an economy experiences involuntary unemployment, it is not operating at full employment.

Answer 15

- **Economic Growth** (increasing real GDP) - **Price Stability** (inflation and deflation) - **Minimising unemployment** - **A stable balance of payments on the current account** (the money the country earns from exports = to the money spent on imports) - **Balancing the government budget** (Gov. Spending = Tax Revenue) - **More equitable distribution of income** - *Increasing welfare* - *Environmental sustainability* **There is a trade off between these objectives, a compromise must be made (as pleasing one may harm another)**

Answer 16

The monetarist view, championed by Milton Friedman, posits that the money supply is the primary driver of inflation, arguing that controlling the money supply is key to economic stability.

Answer 17

This theory posits that an increase in the money supply will lead to an increase in inflation. They employ the Fisher Equation to prove their theory: MV = PQ (M) - Money Supply (V) - Velocity of circulation or number of transactions (P) - Price Level (Q) - Quantity of good and services sold in the economy However, monetarists assume that the number of transactions (V) and the quantity of goods and services (Q) remain relatively stable over time.

Answer 18

Involves the use of government spending, taxation and borrowing to affect the level of growth of AD, output and jobs.

Answer 19

**Speculative bubbles** With rapid economic growth asset prices (e.g. shares or houses) rise and can lead to a speculative bubble in asset prices. When people realise the value of their assets is above their true value they sell them to make a profit. This causes the bubble to burst destroying consumer and business confidence. If households and firms stop spending and investing, the economy may fall into recession. **Changes in inventories** Inventory investment (stockbuilding) occurs when firms invest in stocks of raw materials and stocks of finished goods that are ready to be sold. Firms hold stocks of raw materials and finished goods in order to smooth production and cope with swings in demand. Fluctuations in inventories can be an important determinant of recessions. Stocks of unsold finished goods build up when firms over-anticipate demand for finished goods. Firms are then forced to cut production by more than the original fall in demand to reduce their stocks. This de-stocking can turn a slowdown into a recession **Political cycles** In most democratic countries re-election occurs every 4-5 years. In order to be re-elected the political party in power may attempt to create a boom in economic activity before an electionOnce elected, they may try to deflate AD to avoid inflation and the economy over-heating. This pattern is repeated in line with the next general election **Outside shocks** Demand shocks (AD) and supply shocks (AS). Some shocks may affect both AD and AS simultaneously. Examples: natural disasters affecting crops, change in the price of oil, wars affecting confidence. **Multiplier/accelerator interaction** Multiplier effect: a change in one of the components of AD leads to a greater overall change in national income. Accelerator theory: the theory that the level of investment is determined by past changes in income. This is a Keynesian model. If national income is growing, this will stimulate investment, which will cause an injection into the circular flow of income and, via the multiplier effect, will cause a greater overall increase in national income. This will lead to a further boost in investment. If national income is falling, investment will be depressed, which causes the multiplier/accelerator model to work in reverse

Answer 20

A higher labour demand Results in higher wages Leading to companies passing on these high labour costs to consumers Then general prices rise (inflation) As a result workers want higher wages This then creates a higher labour demand once more.

Answer 21

Keynes said: 'How can V and Q be fixed?' - During a recession, V would decrease - The money supply may increase, but there could be a liquidity trap, which would reduce the number of transactions and this V in the equation would change.

Answer 22

Monetarists argue for a long run natural rate of unemployment. This is because the economy is operating at full productive potential in the long run. When you are using your F.o.Ps at max capacity, there will be a natural rate of unemployment. The SRPC will correct in the long run to the equilibrium set by the output of the economy (Shown as the long run phillips curve (LRPC)

Answer 23

Maintain low unemployment NOT a fixed value

Answer 24

- **Libralise (remove restrictions) lending laws** making it easier/harder to borrow money - **Increase or decrease interest rates** to change saving and borrowing patterns - **Fiscal Policy** - **Open market operations**: central bank intervene to buy (quantitative easing) or sell (quantitative tightening) bonds. Easing expands the money supply, tightening contracts the money supply. **Reserve requiremant for banks**: Lower reserves = banks can lend more; higher reserves = less lending. People pay deposits into banks, and the percentage of this money that the bank can lend out depends on the reserve requirements (e.g. 90p per £1). Changes in the reserve requirements can lead to changes in the money supply. **Foreign Exchange Operations**: Intervention to raise or lower the value of the domestic currency on the international currency market. Changing the exchange rate will affect the money supply

Answer 25

- GDP High - Unemployment Low - Inflation High - Consumer + Business confidence HIGH

Answer 26

**The Unemployed** - A decrease in Yd results in a decrease in living standards - Loss of status, purpose and worth - Stress and depression - Impact on their children - poor health and poorer performance in schools. - Loss of skills and motivation makes it more difficult to find a job in the future - Greater difficulty saving for a pension, long term implications. **The Government** - Negative impacy on the budget due to a loss of tax revenue and increased spending on unemployment related benefits - There may be an increase in crime, therefore more money to police force - More money allocated to the NHS due to poor health of the unemployed workers. - A decrease in consumption leads to a decrease in AD which leads to a decrease in economic growth, therefore resulting in a negative multiplier effect **The Firms** - Increased unemployment means less Yd, resulting in less customers for smaller businesses

Answer 27

A shift to the left of AD, resulting in deflation and negative economic growth. It also demonstrates a **negative multiplier efffect**, when a withdrawal in the components of AD leads to a larger than proportional fall in real GDP. **First shift**- Consumption falls **Second and further shifts** - Falling wages, investment falls, Government spending falls.

Answer 28

Real GDP = (Base year price index ÷ Current year price index) x Nominal GDP

Answer 29

Hyperinflation is an extreme, rapid and out of control increase in the general price level of goods and services in an economy. Examples: Zimbabwe 2008, Germany 1923, Iran 2025 You fix it by stabilising/changing currency

Answer 30

This type of deflation is driven by supply-side improvements such as higher productivity, lower resource prices, and increased innovation. Or, lower C.o.Ps in general.

Answer 31

- **Changes in inflation expectations:** Higher expected inflation means the SRPC shifts upwards (at every level of unemployment, inflation is now higher) and vise versa. This is because if workers expect higher inflation, they negotiate higher wages. Firms costs rise leading to cost push inflation. Inflation is high even if unemployment is unchanged. - **Adverse supply-side shocks** - **Positive supply-side shocks**

Answer 32

- Lower Unemployment - Increase in living standards (as Yd is higher) - Decrease in Poverty - Improved government budget (lower G (less on benefits) and higher T (because of higher incomes)) - Increase in status and power in international organisations

Answer 33

More money chasing the same goods: Prices rise because demand increases. Higher Spending: Extra money boosts consumption and investment. AD shifts to the right: If the economy is near full capacity, prices go up. Too much money = big risk: Can leas to very high inflation (hyperinflation) Economic stakeholders respond to this percieved rise. A hyperinflation cycle starts, people think that hyperinflation is coming - they spend money - this pushes up AD in the economy, which causes inflation... the cycle repeats!! Workers may also demand higher wages as inflation rises.

Answer 34

Fiscal Policy refers to government decisions on taxation, spending, and borrowing aimed at managing economic decisions.

Answer 35

**CPI (Consumer Price Index):** A measure of inflation that is calculated by the Office for National Statistics (ONS). It measures household purchasing power with the Family Expenditure Survey. The survey finds out what consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on each item. Each year, the basket is updated to account for changes in spending patterns. **Retail Price Index (RPI):** RPI is an alternative measure of inflation. Unlike CPI, RPI includes housing costs, such as payments on mortgage interest and council tax. This is why RPI tends to have a higher value than CPI.

Answer 36

**Labour Force Survey (LFS):** (official measure in the UK since 2003) The international labour organisation (ILO) asks people whether they are employed, unemployed, or economically inactive. **The Claiment Count** (This counts the number of people who are claiming unemployment related benefits (JSA and Universal Credit) You must prove that you are looking for work to keep your payments.

Economic Performance Flashcards

(60 cards)