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Besnik Vrellaku____
Economics Revision
KEY TERMS
Economic growth - in the short run, an increase in real GDP, and in the long run, an increase
in productive capacity, that is, in the maximum output that the economy can produce.
Unemployment - a situation where people are out of work but are willing and able to work.
Inflation - a sustained rise in the price level; the percentage increase in the price level over a
period of time.…read more

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Monetary policy - central bank and/or government decisions on the rate of interest, the
money supply and the exchange rate.
Fiscal policy - the taxation and spending decisions of a government.…read more

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Government spending - The governments view on the extent of market failure
and its ability to correct it.
The level of economic activity in the economy can
influence government spending (level of unemployment
in a certain area)
Net exports - Real disposable income abroad, a rise in income aboard
is likely to result in more exports being sold.
Real disposable income at home, a rise in income at
home may result in a fall in exports.…read more

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Objectives of government economic policy
Economic growth:
increasing material living standards
Trend growth, the expected increase in potential output over time. It
is a measure of how fast the economy can grow without generating
inflation.
This means avoiding depleting non-renewable resources and damaging
the environment, also to reduce pollution and searching for cleaner
sources of energy.
Employment and unemployment:
High employment and low unemployment.
Full employment, a situation where those wanting and able to work
can find employment at the going wage rate.…read more

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Having a higher proportion of economically active people should raise
the productive potential of the economy and reduce the cost of
state benefits.
Inflation:
Low and stable inflation, this can also be referred to as price stability.
Low level inflation enable firms to reduce their costs by not raising
wages in line with inflation rather than by making some worked
redundant
Balance of payments:
Current account deficit, when money is leaving the country than
entering it.…read more

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There is also risk that economic growth may result in the depletion of
non-renewable resources.
Economic growth may reduce the quality of some people's lives.
The benefits of economic growth:
A rise in peoples material standard of living,
If real GDP per head rises, the population can enjoy more goods and
services.
Economic growth enables poverty within a country to be reduced.
Higher output raises tax revenue without having to increase tax rates.…read more

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Unemployment can also arise due to problems with the supply labour.
Structural unemployment, unemployment caused by the decline of certain
industries and occupations due to changes on demand and supply.
Technological unemployment, arises when workers lose their jobs because
of advances in technology.
International unemployment, occurs when jobs are lost because firms
decide to carry out some of their work abroad.
Frictional unemployment, short term unemployment occurring when
workers are in-between jobs.…read more

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Consumer price index (CPI), a measure of changes in the price of a
representative basket of consumer goods and services.
Retail price index (RPI), measure of inflation that is used for adjusting
pensions and other benefits to take account of changes in inflation and
frequently used in wage negotiations.
Difficulties of measuring inflation:
Measures of inflation also tend to overstate inflation, as they measure the
price of a fixed basket of products.…read more

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The ability that inflation gives firms too alter workers' real pay can help
labour markets operate more efficiently and reduce unemployment.
DEFLATION - a sustained fall in the general price level.
The significance of inflation:
Cost-push inflation tends to be more harmful for an economy than
demand-pull inflation; cost-push is often accompanied by a fall in real GDP.
High inflation may mean that prices are changing so often that firms
cannot publish prices.…read more

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