3.3 Macroeconomic Objectives (DP IB Economics: HL): Flashcards

Debt generally becomes unsustainable once it passes an equivalent of 90% of GDP.

Larger debt repayments in the present prevent investment for the future, burdening future generations.

Short-term economic growth is an increase in real GDP caused by a change in a component of aggregate demand, shown by a rightward shift in AD.

Long-term economic growth is an increase in productive potential caused by improvements to the determinants of long-run aggregate supply, shown by a rightward shift in LRAS.

It is shown by a movement from a point inside the curve to a point closer to the curve.

It is shown by an outward shift of the entire curve.

False.

Growth driven by higher aggregate supply can actually lower average price levels, so growth need not cause inflation.

Long-term growth is caused by an increase in the quality or quantity of the available factors of production.

Training and education create a more productive workforce, raising the economy's production possibilities.

The economic growth rate is the percentage change in real GDP between two time periods.

Real GDP is used, which is nominal GDP adjusted for inflation using the GDP deflator.

Real GDP is calculated by dividing nominal GDP by the GDP deflator and multiplying by 100.

It is considered the main contributor to an improvement in standards of living.

False.

Growth often increases environmental damage from negative externalities and depletes resources more rapidly.

It can create a lack of equity, as the rich may get richer while the poor get poorer.

A person is unemployed if they are not working but are actively seeking work.

The International Labour Organisation (ILO) Labour Force Survey and the Claimant Count.

The labour force consists of all workers actively working plus the unemployed who are seeking work.

The unemployment rate equals the number actively seeking work divided by the total labour force, multiplied by 100.

Underemployment is when a person is working but wants more hours, or is in a job requiring lower skills than they have.

False.

The measured rate actually falls, because these workers are no longer actively seeking work (hidden unemployment).

Equilibrium occurs where the demand for labour equals the supply of labour.

Real wage unemployment occurs when wages are inflexible above the free-market equilibrium, creating an excess supply of labour.

Structural unemployment is caused by a mismatch between jobs and workers' skills as the structure of the economy changes.

It is a derived demand, arising from the demand for goods and services.

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

It occurs when a season ends and labour is not required until the next season, e.g. fruit pickers or ski instructors.

Frictional unemployment is short-term unemployment when workers have voluntarily left a job to search for another.

The natural rate of unemployment = frictional + seasonal + structural unemployment.

False.

Unemployment can never be 0% because frictional, seasonal and structural unemployment always exist.

The government receives less tax revenue and faces higher welfare expenditure.

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

Disinflation occurs when the average price level is still rising, but at a lower rate than before.

False.

During disinflation prices are still rising, just at a slower rate; falling prices are deflation.

Deflation is a fall in the average price level, occurring when the percentage change in prices falls below zero.

The CPI is an index measuring the average price level of a basket of goods and services that an average household buys.

In the CPI, goods and services are weighted according to the proportion of household spending.

Because the CPI measures an average basket and ignores regional differences, so households buying different goods experience different inflation.

Demand pull inflation is caused by excess demand, shown by a rightward shift in AD that raises the average price level.

Aggregate demand is calculated as AD = C + I + G + (X-M).

Cost push inflation is caused by increases in the costs of production, shown by a leftward shift in SRAS that raises the average price level.

False.

Cost push inflation is shown by a leftward shift in SRAS; a rightward shift in AD causes demand pull inflation.

It decreases purchasing power and erodes the real value of savings.

It erodes international competitiveness, as the country's exports become relatively more expensive.

It is caused by a fall in aggregate demand in the economy.

It is driven by rising productive capacity, so national output rises and unemployment falls.

There is an inverse relationship: when inflation rises, unemployment tends to fall, and vice versa.

Sustainable levels of government debt describe borrowing and debt that are manageable, so a government can meet repayments without placing its economy at risk.

It ensures a fair distribution of costs across generations, avoiding burdening future taxpayers.

The debt-to-GDP ratio expresses total government debt as a percentage of GDP, indicating the sustainability of the debt burden.

The debt-to-GDP ratio is calculated by dividing total government debt by GDP and multiplying by 100.

False.

A higher ratio indicates a larger debt burden relative to the size of the economy, raising sustainability concerns.

A budget deficit occurs when a government's total expenditures exceed its total revenues within a fiscal year.

The government must borrow to cover the shortfall, and this borrowing adds to outstanding government debt.

A surplus means revenues exceed expenditures, and it can be used to repay outstanding debt, reducing the burden.

True.

Financial markets may view new loans as risky and therefore charge higher interest rates, costing taxpayers more.

Crowding out occurs when government borrowing competes for limited savings, raising real interest rates and reducing private investment.

Large debt repayments limit a government's ability to respond to a new crisis, such as a severe recession.

Austerity is a contractionary fiscal policy that raises taxes and reduces government spending to decrease a deficit or pay off national debt.

High national debt can burden future generations through higher taxes and/or reduced services.

A trade-off is where achieving one macroeconomic objective comes at the cost of worsening progress in another.

Growth moves the economy closer to full employment, so prices for scarcer resources are bid up, causing inflation.

Growth often increases pollution, negative externalities and the depletion of non-renewable resources.

False.

As the economy nears full employment, scarcer labour drives wage inflation, creating a trade-off between the two objectives.

The short-run Phillips curve shows a trade-off between unemployment and inflation, where rising inflation accompanies falling unemployment.

Unemployment falls, reflecting the inverse trade-off between inflation and unemployment.

An increase in AD creates a positive output gap, raising the demand for labour so that unemployment falls.

Scarcer labour lets workers negotiate higher wages, causing wage inflation that raises overall inflation.

The long-run Phillips curve is vertical at the natural rate of unemployment, showing no trade-off between inflation and unemployment in the long run.

False.

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

It is located at the natural rate of unemployment (NRU).

In the long run wages and prices are flexible, so the labour market self-corrects back to the natural rate of unemployment.

The natural rate of unemployment is the level consistent with non-accelerating inflation.