Econ U3 CAE flashcards

The economy enters the Boom phase of the economic cycle.

National output increases rapidly -> unemployment falls as firms hire more workers to meet demand -> consumer incomes and living standards rise, but inflationary pressures often increase.

The economy enters a Recession phase of the economic cycle.

National output (GDP) falls for consecutive quarters -> firms face lower sales -> unemployment rises due to redundancies -> poverty rates may increase and productive potential becomes underutilized.

Total demand in the economy grows faster than total supply (Demand-Pull).

Shortages emerge across markets -> competing buyers bid up prices -> the general price level rises (Inflation).

The costs of production (e.g., wages, raw materials, or imported components) rise significantly for firms (Cost-Push).

Firms increase their prices to preserve profit margins -> the general price level increases (Inflation).

The domestic economy experiences a high rate of inflation.

Menu costs increase (updating price lists) + Shoe leather costs rise (searching for better interest rates) + Business/consumer confidence drops due to price uncertainty.

Domestic goods become highly inflated compared to foreign goods.

Domestic exports become less price-competitive abroad -> foreign buyers demand fewer exports -> the current account balance worsens (deficit increases).

An economy suffers from a structural decline in a major industry (e.g., manufacturing closures due to automation or foreign competition).

Workers’ specific skills no longer match the available vacancies in new industries -> long-term Structural Unemployment occurs.

The level of unemployment in an economy rises significantly.

Government spending on unemployment benefits increases + Tax revenue falls (less income tax and VAT collected) -> the government fiscal position worsens toward a deficit.

Unemployment increases across communities.

Household incomes collapse -> poverty rates increase -> consumer confidence falls -> overall negative impacts cascade through society (wasted scarce resources).

A country experiences a severe Current Account Deficit (import spending exceeds export earnings).

There is a leakage of income from the economy's circular flow -> aggregate demand falls + country may face problems finding foreign currency reserves to fund the deficit gap.

Unregulated business activity damages the environment (causing visual, noise, air, or water pollution).

The government intervenes by imposing taxation on polluting firms OR issuing tradable pollution permits to control damage.

The government introduces targeted subsidies for green business alternatives.

Production costs for clean businesses fall -> output of environmentally friendly alternatives increases -> environmental damage is mitigated.

The government introduces highly Progressive Taxation (higher income earners pay a higher percentage rate of tax).

Tax revenues are disproportionately taken from the wealthy -> funds are redistributed via benefit payments, free education, and healthcare -> income inequality and relative poverty are reduced.

The government decides to run an expansionary fiscal policy by lowering direct income taxes and increasing government expenditure.

Consumers hold more disposable income -> consumer spending increases -> aggregate demand rises, reducing cyclical unemployment but risking a fiscal deficit.

The government experiences a persistent Fiscal Deficit (spending exceeds tax revenue).

The government must borrow funds to cover the shortfall -> national debt increases, which may require higher taxes or reduced public spending in the future.

The Central Bank raises interest rates (Contractionary Monetary Policy).

The cost of borrowing increases + the reward for saving increases -> consumers delay large purchases and firms cut back investment -> demand pressures cool down -> inflation is lowered.

The Central Bank utilizes Asset Purchasing (Quantitative Easing).

The central bank injects electronic money directly into the financial system -> asset prices rise and banks have more liquidity -> commercial lending is stimulated to boost economic activity.

The government implements supply-side policies such as privatisation, deregulation, and training/education schemes.

Market efficiency increases + labor productivity improves -> the economy's productive potential (LRAS) shifts outward -> total output increases with lower long-term inflationary pressure.

The government passes strict legislation and introduces heavy fines for uncompetitive behavior or pollution.

Firms face high financial penalties for non-compliance -> corporate behavior changes to avoid fines -> consumer protection and environmental standards improve.