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

A low and stable rate of inflation lets firms confidently plan for future investment.

Government borrowing is used to fund both current and capital expenditure.

Short-term economic growth is caused by an increase in any component of aggregate demand, shown by a rightward shift of AD on an AD/AS diagram.

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

Short-term economic growth is shown by moving from a point inside the curve to a point closer to the curve.

Long-term economic growth is shown by an outward shift of the entire curve.

False.

Long-term growth is shown by a rightward shift of LRAS (or an outward PPC shift); a rightward shift of AD illustrates short-term growth.

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

Training and education make labour more productive, an example of improving the quality of a factor of production.

An economic growth rate is measured as the percentage change in real GDP between two time periods.

Nominal GDP is converted into real GDP using the GDP deflator.

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

Economic growth can increase environmental damage from negative externalities and deplete resources more rapidly.

False.

Economic growth can worsen income distribution, as the rich may get richer and the poor poorer (a lack of equity).

Nominal GDP is found using the expenditure formula C + I + G + (X - M).

Unemployment describes someone who is not working but is actively seeking work.

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

Unemployment is measured using the ILO Labour Force Survey and the Claimant Count.

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

The ILO survey uses the same criteria globally, making unemployment figures comparable between countries.

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

False.

Underemployed workers are in work, so they do not appear in the unemployment statistics.

Discouraged workers who give up looking for work are no longer counted as unemployed, so the rate appears lower.

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

A minimum wage is a legally imposed wage level, set above the market rate, that employers must pay their workers.

Structural unemployment occurs when there is a mismatch between workers' skills and available jobs, usually as the structure of the economy changes.

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

True.

The demand for labour is derived from the demand for the goods and services that labour produces.

Frictional unemployment is short-term unemployment that occurs when workers have voluntarily left a job and are searching for another.

Seasonal unemployment occurs when a season ends and labour is not required until the next season, such as with fruit pickers or ski instructors.

The natural rate of unemployment equals frictional plus seasonal plus structural unemployment.

The labour market is in equilibrium when the demand for labour equals the supply of labour.

Governments receive less tax revenue and face higher welfare expenditure when unemployment rises.

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

Deflation is a fall 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.

Deflation only occurs when the percentage change in prices falls below zero; a falling but still positive rate is disinflation.

The CPI measures the average price level using a weighted 'basket' of goods and services bought by an average household.

Items are weighted according to the proportion of household spending on them, so items making up more spending have a greater weight.

Many economies have an inflation target of 2% per annum, measured using the CPI.

The CPI reflects an average basket, so it ignores regional differences and households whose spending differs from the average.

Demand-pull inflation is caused by excess demand in the economy, shown by a rightward shift of aggregate demand.

Cost-push inflation is caused by increases in the costs of production, shown by a leftward shift of short-run aggregate supply.

Aggregate demand is the sum of C + I + G + (X - M).

Menu costs are the expense to firms of having to change their listed (menu) prices when inflation causes prices to change.

Inflation reduces the real value of savings, as money will be worth less in real terms.

False.

Demand-side deflation (from falling AD) is harmful, but supply-side deflation (from rising productive capacity) can be good, raising output and lowering unemployment.

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

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

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

As growth moves the economy closer to full employment, prices for the remaining scarce resources are bid up, causing inflation that may outpace the 2% target.

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

During high growth, the profits owners of the factors of production receive are disproportionate to any rise in workers' wages, widening inequality.

The short-run Phillips curve shows a trade-off between unemployment and inflation, where rising inflation is accompanied by falling unemployment, and vice versa.

The remaining labour becomes scarcer, so workers negotiate higher wages, and this wage inflation raises overall inflation.

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

False.

The SRPC shows a trade-off, so lower unemployment tends to come with higher inflation, making both objectives hard to achieve at once.

False.

The long-run Phillips curve suggests there is no trade-off in the long run; it is vertical at the natural rate of unemployment.

It is vertical at the natural rate of unemployment, because in the long run wages and prices are flexible and the labour market self-corrects.

It is the unemployment rate consistent with non-accelerating inflation — the level below which unemployment cannot fall without generating inflationary pressures.

Workers see real wages fall and demand higher wages, so firms cut employment and raise prices, returning unemployment to the natural rate at a higher inflation rate.