Economics - Chapter 11
- Created by: sammilaw
- Created on: 29-12-14 10:28
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- Chapter 11: The measurement of macroeconomic performance
- Negative output gap
- When the economy is underperforming and could mean increased unemployment
- Increased unemployment = lower incomes = less expenditure = aggregate demand falls
- Economy could enter into recession or a slump
- Government may take action to increase aggregate demand to try and increase economic activity
- When the economy is underperforming and could mean increased unemployment
- Positive output gap
- When the economy exceeds the normal growth trend
- Less unemployment = increase in incomes (possibly = aggregate demand exceeding aggregate supply = increased inflationary pressure)
- Known as recovery or boom
- Will lead to inflation so the government is likely to try and reduce aggregate demand
- When the economy exceeds the normal growth trend
- Unemployment
- Unemployment has a huge opportunity cost - represents a waste of scarce resources as output lost can never be recovered
- Creates negative externalities - i.e. increased crime rates, run-down shops
- Improvements in technology may lead to higher unemployment
- Inflation
- A persistent increase in the level of prices
- As aggregate demand increase, firms will be able to pass on their increased labour costs in the form of increased prices
- Eventually, demand will fall and actual growth will slow
- Could lead to unemployment
- Too high a level of aggregate demand during a positive output gap = increased inflation
- Too low a level of aggregate demand during a negative output gap = increased unemployment (BoE would try to increase aggregate demand)
- Negative output gap
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