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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.…

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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.
· Actual growth achieved may fall below the productive capacity of the economy
· Actual output may be below potential output…

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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.
· Governments try to achieve a reasonably fair…

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reasons for continuing deficits:
· 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
· The UK has an appetite for imported…

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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…

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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…

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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…

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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…

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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…

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the solution: for the authorities to increase 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…


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