Economics - Chapter 11

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  • 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
    • 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
    • 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)


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