Macroeconomic Objectives

Question 1

Main Macro Objectives

Answer 1

Low & Stable Inflation
Low unemployment
Economic growth

Question 2

underemployment

Answer 2

people of working age with part-time jobs when they would rather work full time (do not make full use of their skills)

Question 3

definition

unemployment

Answer 3

the people of working age who are actively looking for a job but who are not employed

Question 4

unemployment rate/labour force

Answer 4

fraction of the population of a country number of working age people who are unemployed

no.unemployed/labour force x100

excludes: children, diabled, retired, adult students

Question 5

difficulty of measuirng labour force/unemployment

Answer 5

hidden unemployment:
- workers who gave up
- workers in informal economy
- no distinction between full & part time
- type of work (highly vs lowly trained)

=> does not account for where the unemployment is concentrated (region, ethnic group, gender, age, occupation)

Question 6

6 consequences of unemployment

Answer 6

1. loss of real GDP
2. loss of tax revenue for government
3. decreased income
4. unequal income distribution
5. cost to government for unemployment beenfits
6. cost to government with social problems from unemployment

Question 7

social problems from unemployment

Answer 7

• increased crime
• increased drugs
• increased stress
• increased indeptness
• increased homelessness
• family breakdown

Question 8

types of unemployment

Answer 8

• frictional = between jobs
• structural = misalignemnt with skills and geographical location
• seasonal = demand for labour changes with season causing variation in needs
• cyclical = business cycle

Question 9

causes for structural unemployment

Answer 9

SIGNIFICANCE DEPENDS LARGELY ON LABOUR MOTILITY

1. changes in demand for particular skill
2. changes in geographical location of jobs
3. labour market rigidities
   => factors preventing forces of supply and demand from operating in labour market

eg: minimum wage (wages too high for firms), trade union (higher wages), employment protection law (cautious to hire)

RWE = germany with STRONG labour protection laws!

Question 10

cause of cyclical employment

Answer 10

• changes in aggregate demand ONLY
  => based on derived demand for labour (since ppl want goods)
  so when no one wants goods = no one needs labour

=> classical/keynesian diagram

1. speak about initial
2. speak about Ad shift
3. Speak about output change
4. Speak about employment level of output = determines how much resources used = how much labour available

Question 11

inflation

Answer 11

sustianed increase in general price level

Question 12

Disinflation

Answer 12

inflation occuring at a lower rate

Question 13

consumer price index in relation to inflation

Answer 13

CPPI = measure of cost of living for the typical household and compares basket of goods and services in one year (no food/energy/short temr fluctuations)

Inflation/Deflation measured as a percentage change in the value of the basket from one year to another

Question 14

Why CPi leads to problems in the experience of inflation by different income earners

Answer 14

1. CPI is only average rate of change of inflation
2. different consumers have different consumption patterns depending on their income levels

e.g richer people spend more on luxury than inferior

Question 15

why inflation figures do not accuartely represnet CPi componnets

Answer 15

1. depends on regional and cultural factors
2. depends on consumers substitutions made
3. depends on discounts and sales
4. introduction of new products
5. change in product quality

Question 16

PPI

Answer 16

producer price index is a measured price level change from the point of view of producers which can be used as a preidctor of change for inflation.

Question 17

5 consequences of high inflation rate

Answer 17

1. redistribution effect
   => lenders, poor people, fixed wage people LOSE
   => borrowers, payers of income, payers of less rapidly than inflation increasing wages GAIN
2. Uncertainty & cautiousness
3. Menu costs
   => print new menus/advertisements
4. Money Illusion
   => feel better off but their moeny is actually worth less
5. International export competitiveness decreases

Question 18

5 consequences of deflation

Answer 18

1. redistribution effect
2. uncertainty
3. menu costs
4. deflationary spiral (falling AD, spending decrase, unemployment increase)
5. international export competitiveness increases
6. bankruptcy and financial crisis (real value of dept increases)

Question 19

causes for deflation

Answer 19

decrease in AD

increase in SRAS

Question 20

conflicting macroeconomic objectives

Answer 20

1. Growth vs inflation
2. Growth vs Income Equality & Living standards
3. Growth vs Environmental Protection

Question 21

Reason for income inequality

Solutions

Answer 21

1. physical capital investment technology instead of into people (e.g agriculture)
2. low level of government spending in human capital
3. allocating resources to urban instead of rural

BUT
+ closing gap due to growth
+ escape absolute poverty
+ more equaö distribution due to growth

= progressive tax, tax brackets, welfare payment

Question 22

Macro objective conflicts

economic growth threatnening environmental sustainability

solutions

Answer 22

• unsustainable resource use
• gov. momentary growth>sustainable growth (irreversible damage)
• ressources need allocation to environmental protection

BUT
+ sustainable businesses act as role model

internalise externalities, environemntal regulation, human capital, emphasis on green technology

Question 23

When economic growth is beneficial

Answer 23

1. good income distribution
2. C on education and health
3. more income controlled by women
4. gov spending on merit goods
5. contributions to NGO’S

Question 24

voluntarily unemployed/economically inactive

Answer 24

people who are of working age but have opted out of the labour force (students, stay at home parents, early retires)

Question 25

economic growth

Answer 25

increase in total real output produced by an economy over time

Question 26

actual growth

Answer 26

growth due to reduction of unemployment or improvement of inefficient resources ## Footnote movement towards PPC

Question 27

Short term growth

Answer 27

growth of rGDP in economy over a short period of time where at least one FOP is fixed caused by - AD outwards shift (demand driven economic capacity) - point towards PPC (reduction in unemployment/more efficiency) (!SRAS outward shift - not as important as lower costs are temporary)

Question 28

long term growth

Answer 28

growth of rGDp in an economy over a long period of time where FOP are flexible causes - economic capacity increase (LRAS out) - PPC out - more quality & quantity - institutional changes/efficiency - technology

Question 29

Labour market rigidities

Answer 29

Factors preventing the natural forces of demand and supply from operating in the labour market 1. minimum wage legislation 2. labour union activities & collective bargaining power 3. employment protection laws 4. generous unemployment benefits

Question 30

Diagrams to show how labour market rigidities affect structural unemployment

Answer 30

1.Minimum wage and trade union Diagram 1 => minimum wage diagram with demand and supply of kabour => surplus of labour 0 unemployment Diagram 2 => supply and demand of a product (product market) => supply shifts in due to higher wage costs decreasing profitability => smaller quantity produced = firms hire smaller wuantity of labour => contributes to natura rate 2. mismatch of skills 0> demand and supply of labour diagram => demand for that specifc job decreases => lower quantity of labour => structural unemployment