Lesson 12

    Cards (34)

    • What are the primary causes of fluctuations in GDP?
      Fluctuations in aggregate demand
    • What components can cause demand shocks in aggregate demand?
      Consumption, investment, government spending, net exports, and monetary policy shocks
    • Why is private investment considered the most important source of fluctuations in aggregate demand?
      Because it is more volatile despite being a small part of aggregate demand
    • What is the cumulative process in relation to GDP and aggregate demand?
      • An exogenous rise in aggregate demand causes a multiple increase in GDP.
      • GDP stops rising when injections equal withdrawals.
      • Example: If investment rises by £100mn with a marginal propensity to withdraw of 0.4, GDP rises by £250mn.
      • If investment spending rises with GDP, the upward movement can continue longer.
    • What does the multiplier effect indicate about an increase in aggregate demand?
      An increase in aggregate demand leads to a multiple increase in GDP
    • If investment rises by £100mn£100mn and the marginal propensity to withdraw is 0.40.4, what is the total increase in GDP?

      £250mn£250mn
    • What are the three reasons that investment spending can continue to rise with GDP?
      1. The accelerator effect
      2. The availability of funds
      3. Expectations
    • How does the accelerator model relate investment to GDP?
      Investment is linked to changes in GDP through the capital output ratio
    • What happens to investment during a recession according to the accelerator model?
      Investment falls as GDP decreases
    • What role do retained profits play in the availability of funds for firms?
      Firms use retained profits to finance innovations and inventions
    • How do interest rates affect firms' borrowing during different phases of the business cycle?
      Borrowing costs are lower during recessions when interest rates are low
    • How do business expectations influence production plans?
      Current decisions are influenced by volatile or self-fulfilling expectations
    • What are the factors that can lead to the slowing of economic expansion?
      • Capacity constraints in resources
      • Rising prices of labor and capital
      • Slowing GDP leading to reduced investment
    • What is the 'floor' in the context of economic contractions?
      The floor is a low level of GDP that is not zero
    • What role do unemployment benefits play during economic downturns?
      They serve to limit the fall in GDP
    • What is the significance of turning points in business cycles?
      Turning points are hard to predict and explain
    • What organization has been dating business cycles in the USA since the late 19th century?
      The NBER (National Bureau of Economic Research)
    • What are the two measures of unemployment discussed in the study material?
      • Claimant count
      • ILO unemployment
    • What does the claimant count measure in the UK?
      It measures all those claiming unemployment-related benefits
    • What are the problems associated with the claimant count measure?
      Changes in the benefit system, non-claimants not counted, and double counting of multiple job holders
    • How does the ILO measure unemployment classify individuals?
      1. ILO employed: at least 1 hour of work per week or job training.
      2. Unemployed: out of work or not tried to find work for 4 weeks.
      3. Economically inactive: everyone else.
    • What is the advantage of the ILO unemployment measure?
      It measures those who say they are unemployed, not just those claiming benefits
    • What is the disadvantage of the ILO unemployment measure?
      It lumps together anyone who does just one hour of paid work with those working longer hours
    • What are the three key concepts used in the ILO measure of unemployment?
      • Unemployment rate: unemployed people divided by total labor force.
      • Labor force: total employed and unemployed in the economy.
      • Participation rate: percentage of working age population in the labor force.
    • What are the types of unemployment discussed in the study material?
      • Frictional unemployment
      • Structural unemployment
      • Equilibrium unemployment
      • Cyclical unemployment
      • Involuntary unemployment
      • Voluntary unemployment
    • What is frictional unemployment?
      Short-term unemployment associated with matching workers with jobs
    • What is structural unemployment?
      Long-term unemployment due to mis-matching of skills and vacancies
    • What is cyclical unemployment?
      Extra unemployment that occurs during periods of recession
    • What is involuntary unemployment?

      Unemployment that occurs when individuals do not choose to be out of work
    • What is voluntary unemployment?

      Unemployment that individuals choose to take
    • What causes cyclical unemployment?
      • Caused by a negative output gap.
      • Requires wages to be sticky.
      • Labour markets are not competitive.
    • What causes frictional and structural unemployment?
      • Frictional unemployment: normal turnover of labor.
      • Structural unemployment: shifts in demand for products, geographical job distribution, and technological change.
    • How has the shift from manufacturing to service sector employment affected unemployment?
      It has fostered structural unemployment due to changes in job demand
    • What recent changes have contributed to structural unemployment?
      Decline in manufacturing and competition from countries like China