Economics - mod 2 - unit 3 - part 1

Question	Answer
What is the macro-economic objective of the government on the trend rate of growth?	To increase the growth performance of the economy by raising the trend rate of growth. The trend rate is the increase in the productive capacity that is sustainable without causing inflation above a rate of 2%.
What is the trend rate of growth in the UK?	2.25 % - 2.5 %
What is the macro-economic objective of the government on unemployment?	To minimise unemployment and therefore increase the proportion of the working population who are in work.
Which method does the government use to measure the rate of unemployment?	The International Labour Force Survey.
What is the macro-economic objective of the government on price stability?	To achieve price stability meaning, maintaining the average rise in prices at 2% per year. This is the rate that is considered compatible with achieving a trend rate of growth of 2.25%.
What is the macro-economic objective on trade?	To achieve an external trade balance meaning exports equal imports. The UK suffers from a current account deficit meaning the import of goods and services exceeds the exports of goods and services.
How can the UK reduce its trade deficit?	Improving productivity is regarded as key to reducing the UK’s deficit of imports over exports.
What is the multiplier effect?	An initial change in aggregate demand will lead to a greater change in real national income and output.
What is the positive and negative multiplier effect?	A positive multiplier effect means an initial rise in consumer spending will lead to a greate rise in real GDP. A negative multiplier effect means an initial fall in consumer spending will lead to a greater fall in real GDP.
What is the cause of the multiplier effect?	Firms will increase investment spending to expand their productive capacity to meet higher demand. The government will also increase spending as they will generate higher tax revenues.
How will injections and leakages effect the multiplier?	A greater level of injections into the economy will increase spending and cause a greater multiplier effect. A greater level of leakages in the economy will lead to a smaller multiplier effect of an increase in injections.
What is the accelerator principle?	This is the principle stating that an initial change in GDP will cause a change in the rate of new investment. A rise in real GDP growth will cause a rise in the level of investment. A fall in real GDP growth will cause a fall in the level of investment.
What is an economic shock?	An economic shock is a factor that causes the macroeconomic equilibrium to change and the economy to diverge from its potential or trend rate of growth.
Why will economic shocks have a significant effect on the economy?	The effect of an economic shock on the macro economy is likely to be more significant because of the interaction of the multiplier and accelerator concepts.
What is a demand side shock?	A demand side shock is any factor that causes a significant change in aggregate demand such as the negative effect of the bank crisis on consumer confidence.
What is a supply side shock?	A supply side shock is any factor that causes a change in short run aggregate supply such as a significant rise in oil prices.
When does an output gap exist in an economy?	An output gap exists when actual output diverges from potential output. Potential output is indicated by the long run aggregate supply curve (LRAS).
What is a positive (inflationary) output gap?	When the economy is operating above its LRAS trend it is experiencing a positive output gap, and is at risk of inflation. This means the economy is experiencing a boom.
What is a negative (recessionary) output gap?	If the economy is operating below its LRAS trend, it is experiencing a negative output gap and this implies the economy is at risk of recession and unemployment.
Define inflation.	The average rise in the price level that causes a fall in the purchasing power of money leading to a fall in living standards.
How does the government measure inflation in the UK?	A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.
How is the CPI used by the Bank of England and UK Treasury?	CPI is published monthly by the Bank of England who have set the base rate of inflation of 2%. CPI is used by the UK Treasury to set the increases in state benefits and pensions, having switched from RPI in 2010.
What is the difference between CPI and RPI?	CPI does not include mortgage costs. Retail Index Index (RPI) differs from CPI as it includes mortgage costs in its claculation, which the CPI excludes.
What is demand pull inflation?	This occurs when the level of aggregate demand is growing faster than the productive capacity of the economy (AS) can cope with. This implies there is excess demand for goods and services which allows firms to raise prices in order to make higher profit.
When is demand pull inflation likely to occur?	This type of inflation occurs during an economic boom when the economy is growing above its trend rate of economic growth.
What is cost push inflation?	This occurs when firms raise prices in response to a rise in their production costs. Supply will shift left, and the economy will be operating below its potential resulting in a negative output gap.
Why is inflation a threat to UK economic stability?	-Reduces the purchasing power of money hence living standards -Creates uncertainty among consumers -Reduces competitiveness of UK exports as goods and services are more expensive
Define deflation.	Deflation is a fall in the average level of prices and means inflation is negative, and a rise in the purchasing power of money.
What is the cause of deflation?	Deflation is likely to occur during a recession when households have lost confidence and are reducing consumption of durables because they expect prices to be cheaper in the future.

Next up

Economics - mod 2 - unit 3 - part 1

Description

Resource summary

Similar

	Created by Amardeep Kumar over 9 years ago