3.3 - Macroeconomic objectives

What is economic growth?

An increase in real GDP over time.

How can economic growth be shown using a PPC diagram?

By an outward shift of the PPC, indicating an increase in productive potential.

How does economic growth appear on an AD/AS diagram?

A rightward shift of LRAS or an increase in potential output shifts AD right.

Why is investment important for growth?

It increases physical and human capital, boosting productivity and long-term output.

Why is productivity important for growth?

Higher productivity means more output with the same input, increasing potential GDP.

What are potential consequences of growth?

Improved living standards, but can cause inequality and environmental degradation.

What is unemployment?

The state of being able and willing to work but unable to find a job.

How is the unemployment rate calculated?

Unemployed people / labour force × 100

What is the natural rate of unemployment?

The sum of structural, frictional, and seasonal unemployment when the economy is at full output.

What causes cyclical unemployment?

A fall in AD during a recession.

What causes structural unemployment?

Changes in demand for skills, industry relocation, or labour market rigidities.

What are the types of unemployment?

Cyclical, structural, frictional, seasonal.

What are the economic consequences of unemployment?

Lower income, reduced output, fiscal costs, and social unrest.

What is inflation?

A sustained increase in the general price level.

What is disinflation?

A fall in the rate of inflation.

What is deflation?

A sustained decrease in the general price level.

How is inflation measured?

Using a consumer price index (CPI).

What causes demand-pull inflation?

An increase in AD beyond potential output.

What causes cost-push inflation?

Rising production costs, e.g., wages or raw materials.

What are the costs of high inflation?

Uncertainty, reduced purchasing power, menu and shoe leather costs, income redistribution.

What are the costs of deflation?

Delayed consumption, higher real debt burden, lower output.

What is the trade-off between inflation and unemployment?

In the short run, lower unemployment may come with higher inflation (Phillips curve).

What is national debt?

Total amount of money a government owes.

How is national debt measured?

As a percentage of GDP.

What are the costs of high debt?

Higher interest payments, reduced fiscal space, risk of default.

What is the short-run Phillips curve?

Shows the trade-off between inflation and unemployment.

What is the long-run Phillips curve?

Vertical at the natural rate of unemployment; no trade-off between inflation and unemployment.