AS Economics Macroeconomy

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ECON 2: REVISION (from chapter 14-20)
Macroeconomic policy objectives:
Full employment/low levels of unemployment
low levels of inflation
external balance
Economic growth
chapter 14:
Full Employment
· Unemployment in an economy represents a waste of a scarce factor of production that
could be increasing economic welfare by producing G&S.
· Governments want to promote full employment because it leads to better economic
welfare in increasing the standard of living ­ reducing risk of economic, social and health
· For the government: full employment gives them a healthier level of income through
income tax payments and the reduction in their expenditure on benefits, leaving them with
more funds to spend on public and merit goods e.g. education, this may increase LRAS
how governments achieve full employment
increasing AD
· An increase in AD to the right to AD1, this will increase full employment with a few price
· A further increase in AD from AD1 to AD2 will take the economy to the full employment
· An increase from beyond AD3 will cause an increase in the level of inflation. This can occur
through government activity which focuses on demand-side expansion and AD increases
past AD3 this causes inflationary pressure and a balance of payments deficit as UK
goods internationally were less price competitive as they appeared more expensive in
foreign markets, this caused UK consumers to purchase cheaper imports also.
· Governments in the 1960s and 1970s have tried to trade off by reducing unemployment
until inflation and BOP deficit were too high and then reversing their policy = this is known
as the boom/bust policy.
Increasing LRAS
· Employment can also being increased with the use of supply-side policies which will
increase LRAS
· These supply-side policies can be implemented such as, focusing on the labour market and
making a numerous amount of labour more flexible with skills that make them more
employable, increasing amount of employment
· This can be seen as a better idea than the government trying to increase AD as it produces
a much healthier situation as output is increasing (more employment) and at the same
time prices are decreasing, this reduces inflation and makes UK economy more competitive
· This approach is better in the sense that full employment can be obtained without creating
the trade-offs at the full employment level, which can be seen in the Keynesian technique
of increasing AD, leading to inflation and BOP deficit
Economic growth

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Increasing economic growth produces a situation where an economy is able to produce
more goods and services over time and represents an increase in the economy's
productive capacity.…read more

Page 3

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Inflation is a persistent rise in average prices in an economy, the UK has an inflation target
of 2% CPI, which is thought to be beneficial in the economy. Some economy's reach CPI of
1,000 % per annum this is hyperinflation.…read more

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· A shift in the economy away from manufacturing and into services, meant a
continuing run-down of manufacturing output, which means we have to import various
manufactured goods that we would have previously produced, increasing spending on
imports.…read more

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Brazil, Russia, India and China) realise the importance of high economic growth rates to
end poverty and achieve more economic well-being for their populations. At 2.5% rates of
growth the economy is thought to remain stable. Factors that increase an economy's
productive capacity will allow the economy to grow at a more rapid rate ­ these will be
supply-side factors such as increasing skilled labour through education and training,
meaning there are more employable labour in the econ.…read more

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Governments that tax firms more largely than other countries will mean more of their
firms will relocate in lower-taxed economy's where they will gain more profit, others will
stay and invest in capital equipment in the hope that their profits will increase from cap
· LRAS shifting to the right = increased output/productivity and lower prices, meaning that
the economy will be more price competitive in foreign markets and therefore gain more
demand, assisting to our BOP.…read more

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When the economy is at point A on the boundary then the production of consumer goods
is favoured, production of consumer goods at OX whilst production of capital goods is at
· Assume: as a result in a desire to save the economy moves to point B, increasing the
production of capital goods meaning an increase in the productive capacity of the
economy, increasing economic growth and therefore shifting the PPB outwards.…read more

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Demand-side factors lead to demand pull inflation ­ the excess demand pulls the prices up.
Demand-side factors are anything that causes an increase in AD: an increase in C, I G or X
can exert inflationary pressure on the economy.
· Increases in any of these components can will have different effects at different times in
the business cycle.…read more

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Full employment is best shown by the LRAS curve
· If AD increases beyond AD1 the labour market will tighten as there will be a scarcity of
labour in the economy and prices will begin to increase.
· If the authorities take steps to restrict the level of AD to shift just to AD1 then the full
employment level is dependent on what the inflation target is of that government or what
is stated as acceptable.…read more

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AD which is likely to occur if the MPC
reduces the rate of interest.
· At AD2 the economy is in full employment therefore the economy would be experiencing
very low rates of unemployment as the economy would be in a positive output gap.…read more


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