11. Economic Performance (AQA A Level Economics): Flashcards

It represents long-run economic growth, a change to the potential or normal production output of an economy.

A negative externality is a cost imposed on third parties, such as the air pollution and plastic waste generated by economic growth.

Economic growth can raise employment and incomes and improve standards of living through better healthcare and education.

False.

Growth may be unevenly distributed, with higher-income individuals often gaining disproportionately and worsening income inequality.

Growth often creates negative externalities such as air pollution, plastic waste and the depletion of natural resources.

Intensive economic growth can lead to the depletion of natural resources.

The standard of living is the level of material comfort and quality of life, which a higher GDP can improve through better healthcare, education and incomes.

Growth may not be evenly distributed across regions, so some areas grow rapidly while others lag behind in jobs, infrastructure and living standards.

True.

Rapid growth can lift inflation, which raises export prices and can reduce international competitiveness.

Growth often lets governments invest in infrastructure such as roads, public transport and broadband, raising economic efficiency.

If the gains from growth are concentrated among a few, it can worsen income inequality.

As firms expand and create jobs, many individuals experience rising wages and higher incomes, though the gains are often uneven.

The economic cycle refers to the fluctuations in real GDP that occur around the long-term trend rate of growth over time.

The four phases are boom/peak, slowdown/downturn, recession and recovery.

True.

A recession is defined as two consecutive quarters (six months) or more of negative economic growth.

A positive output gap occurs when real GDP is above the long-term trend, with the economy producing beyond its full potential.

A positive output gap is identified as growth of real GDP that is above the long-term trend.

A negative output gap occurs when real GDP is below the long-term trend, leaving the economy with spare capacity.

A boom features high rates of economic growth and falling unemployment, usually with rising demand-pull inflation.

False.

A recession usually brings low inflation, along with rising unemployment and a widening negative output gap.

High borrowing during a boom can become unsustainable, and when the debt collapses it can tip the economy into recession.

Animal spirits is Keynes's term for how investment decisions rise or fall based on human emotion rather than intrinsic value.

Demand and supply side shocks can cause sudden, significant changes in economic conditions.

It represents the underlying, sustainable rate at which an economy can grow over the long run, after accounting for cyclical fluctuations.

A person is unemployed if they are not working but are actively seeking work and are part of the labour force.

UK unemployment is measured by the ILO/Labour Force Survey and the Claimant Count.

True.

The Claimant Count records the number of people claiming Jobseeker's Allowance and meeting regularly with a work coach.

Structural unemployment occurs when there is a mismatch between jobs and skills as the structure of an economy changes.

Cyclical unemployment is caused by a fall in aggregate demand, typically during a slowdown or recession, leading firms to lay off workers.

Frictional unemployment is short-term unemployment that occurs when workers are between jobs, having left one to search for another.

Real wage unemployment occurs when wages are inflexible at a point higher than the free-market equilibrium wage.

True.

A minimum wage set above equilibrium creates an excess supply of labour, which represents real wage unemployment.

The natural rate of unemployment is the equilibrium unemployment made up of frictional and structural unemployment when the labour market is in equilibrium.

At the natural rate of unemployment, cyclical (demand-deficient) unemployment is zero, leaving only frictional and structural unemployment.

Seasonal unemployment occurs when labour is not required until the next season.

Long-term unemployment damages individuals through lost income and the government through lower tax revenue, as well as firms and the wider economy.

False.

That describes voluntary unemployment; involuntary unemployment is when workers are willing to work at the current wage but no jobs are available.

Inflation is the sustained increase in the average price level of goods and services in an economy.

True.

Deflation is a fall in the average price level, so it requires the percentage change in prices to be negative.

Inflation can be caused by demand-pull inflation or cost-push inflation.

Disinflation occurs when the average price level increases but at a decreasing rate than before.

Demand-pull inflation is caused by excess demand in the economy.

Cost-push inflation is caused by increases in the costs of production in an economy.

The short-run aggregate supply (SRAS) curve shifts to the left.

Fisher's equation of exchange is MV = PQ, which underpins the quantity theory of money.

True.

With velocity held constant, the quantity theory of money implies a proportional rise in nominal national income, i.e. inflation.

In the equation MV = PQ, the letter V signifies the velocity of circulation of money.

Adaptive expectations assume that individuals base their expectations on past observations and experiences.

Under rational expectations, individuals form expectations using all available information, including current and past data.

Inflation causes a fall in real income for those on fixed incomes or pensions, reducing their purchasing power.

False.

Low inflation is not bad; it is a sign of a healthy economy and is indicative of economic growth.

Deflation occurs when there is a fall in the average price level of goods and services in an economy, as measured by the CPI.

True.

Deflation means the average price level is actually falling, so the inflation rate must be negative.

Deflation can be caused by either demand-side or supply-side factors.

Demand-side deflation is caused by a fall in total (aggregate) demand in the economy.

The real cost of borrowing increases as real interest rates rise when the price level falls.

True.

It results from falling aggregate demand and output, which raises unemployment and reduces confidence.

Consumers get into the habit of delaying purchases, waiting for prices to fall further, which weakens the effect of fiscal and monetary policy.

Debt feels more burdensome because the real value of the debt rises as prices fall.

Supply-side deflation is caused by increases in the productive capacity of the economy.

Unemployment falls, as lower costs raise firms' output and more workers are required.

False.

Supply-side deflation raises the productive capacity of the economy, so national output actually increases.

Persistently falling prices can prove attractive to foreigners, so the level of exports may increase.

Imported inflation occurs when the prices of goods and services imported from other countries increase, raising the UK's domestic price level.

Two common sources are imported oil and food supplies.

True.

Because the UK depends on imported oil, rising global oil prices raise costs in transport, manufacturing and energy.

When global oil prices rise, UK costs in transport, manufacturing and energy production all increase.

The Ukraine–Russia conflict raised global wheat prices in 2023, increasing the cost of imported wheat-based products in the UK.

A depreciation of the pound raises import prices, increasing the cost of imported goods and raising inflation.

True.

A stronger pound lowers import prices, which reduces inflationary pressures.

It may increase demand for UK exports, contributing to inflation in the UK.

Theoretically, the global value of exports will be equal to the global value of imports.

False.

Global shocks tend to increase inflationary pressures, while periods of stability and peace dampen them.

Producers depend heavily on imported raw materials; for example, a motor car has around 30,000 parts sourced globally.

It may reduce demand for UK exports, leading to lower prices and reducing inflation.

It may lower unemployment but could also contribute to inflation.

True.

With firms operating near full capacity, the demand for labour is high, leading to lower unemployment.

A negative output gap creates downward pressure on prices and wages.

The short-run Phillips curve shows that there may be a trade-off between unemployment and inflation.

Falling unemployment is often accompanied by rising inflation.

False.

On the short-run Phillips curve, rising unemployment is usually accompanied by falling inflation.

Scarcer labour lets workers negotiate higher wages, causing wage inflation in the economy.

The natural rate of unemployment is the unemployment rate when the economy operates at its full potential, consistent with non-accelerating inflation.

True.

In the long run there is no trade-off, so the LRPC is vertical at the natural rate of unemployment.

The long-run Phillips curve suggests there is no trade-off between inflation and unemployment in the long run.

In the long run, wages and prices are flexible.

They should use supply-side policies, such as education, training and labour market reforms.

High economic growth often increases pollution, negative externalities and the depletion of non-renewable resources.