1. Macro Topic 3: Performance

Characteristics of a Boom

Growth faster than trend

High Profits

Low Unemployment

High Consumer and Business Confidence

High Import Demand

Rising Tax Revenues

Inflation

Characteristics of a Recession

Declining AD

High Unemployment

Sharp falls in confidence

De-stocking and discounting

Falling House Prices and Construction Prices

Lower Inflation

Loose Policy (Expansionary Monetary and Expansionary Fiscal)

Low Import Demand

Characteristics of a Recovery

Rising Consumer and Business Confidence

Higher House Prices

Higher Investment

Increase in Construction

Loose Policy (Expansionary Monetary and expansionary Fiscal)

Causes of Short Run Economic Growth

Lower Interest Rates

Lower Income/Corporation Tax

Increase in Consumer/Business Confidence

Increase in Government Spending

Weak Exchange Rate

Causes of Long Run Economic Growth

Increase in Labour Productivity

Increase in the Workforce Size

Investment

Infrastructure Improvements

Increase in Competition

New Resource Discoveries

Benefits of Economic Growth

Higher Disposable Income

Higher Employment

Higher Profit for Firms

Higher Fiscal Dividend for Gov (Increase in tax revenues)

Costs of Economic Growth

Inflation

Rising Income Inequality

Environmental Costs

Current Account Deficit (due to rising import demand)

Benefits of Unemployment

Greater Pool of Workers for Firms

Lower Inflation

Improved Current Account Position

Time for Workers to find Suitable Job

Costs of Unemployment

Lost Output

Deterioration of Government Finances

Social Costs

Costs to other countries

Lost Income

Hysterisis (Long term Unemployment, loss of skills so drop out of the labour force)

Determinants of the Natural Rate of Unemployment

Generous Benefits System

Excessive Labour Market Regulation

Lack of Transport/Housing Infrastructure

Lack of In Work Training

Causes of Demand Pull Inflation

Lower Interest Rates

Lower Income/Corporation Tax

Increase in Consumer/Business Confidence

Increase in Government Spending

Weak Exchange Rate

Causes of Cost Push Inflation

Increase in Raw Material Prices

Increase in Wages

Increase in Business Taxes e.g. VAT

Increase in the price of imported raw materials due to a weaker exchange rate

Benefits of Inflation

Higher Wages

Consumption is Natural

Firms Encouraged to Increase Output

Can Keep Unemployment Low in a Recession

Reduces Real Value of Debt

Improvement of Government Finances

Costs of Inflation

Lower Purchasing Power

Erosion of savings

Lower Export Competitiveness

Wage/Consumer Spirals

Fiscal Drag

Inflationary Noise

Benefits of Supply Side Deflation (good deflation)

Higher Growth (AD will shift to the right long run)

Short Term and Unanticipated

Falling Prices for Consumers

Falling Input Prices for Firms

Costs of Demand Side Deflation (bad deflation)

Lower Growth (AD shifts left so unemployment)

Long Term and Anticipated

Delayed Spending

Positive Real Interest Rates

Increases Real Value of Debt

What causes a movement along the Short Run Phillips Curve

Shifts in AD

What causes a shift in the Short Run Phillips Curve

Shifts in SRAS