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Chapter 4 - Inflation

A general and sustained rise in the general price level over time

CPI, Consumer Price Indea, offucial UK measurement of inflation, CPI includes 87% of the goods in the RPI basket, however also includes items such as cars, computer hardware etc

RPI, Basket of goods, prices measured them compared over time

Government want inflation in the UK to be at 2.0%

Demand pull

Demand side

Aggregate demand outpaces aggregate supply

Cost push

Supply side

Substantial increases in the cost of important goods or services where no suitable alternative is available


Inflation has a marked impact on some social groups, eg pensioners or workers in a weak bargaining position

Redistributed money from savers towards borrowers

Workers will want higher wages if they think inflation will occur

Rapid inflation creates uncertainty in an economy

Price signals will become blurred

Main Causes

Demand pull, Loose fiscal policy, Loose monetary policy, Weak exchange rate

Cost push, Higher wages, Higher indirect taxes, Higher import prices, High commodity prices


Demand pull, Demand side policies, Tighten fiscal policy - reduce gov. spending, Tighten monetary policy - rise interest rates

Cost push, Supply side policies, Increase investment, Increase education & training, Reduce union power, Increase immigration, Raise productivity

Factors effecting inflation

Exchange rate


Information technology (raising productivity)


Deflation is a sustained reduction in the general level of prices

Falling aggregate demand causes it, firms cut their prices to cope with the fall in demand

Chapter 5 - The Current Account


Strong pound -> imports cheap -> exports dear


Weak pound -> imports dear -> exports cheap

Balance of payments

+ exports of goods - imports of goods = balance of trade in goods

+ exports of services - imports of services = balance of trade in services

+/- net income flows +/- net transfers = current account balnce

The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

Exchange rate

The rate at which one currency will be exchanged for another, Appreciation of the exchange rate means that is it stronger, Growth falls, Unemployment rises, Inflation falls, Current account worsens, Depreciation on the exchange rate means that it is weaker, Growth rises, Unemployment falls, Inflation falls, Current account improves

Chapter 6 - AD / AS

AD = C + I + G + (X-M)

Consumption - Consumer confidence

Investment - Business confidence, interet rates

Government Spending



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Chapter 1 - Macroeconomics

Scarce Resources - Factors of Production, used to make output





Supply Side

Economy has a limited level of output

Economic Problem = infinite wants & finite resources

Economies ability to make output increases over time UK = 2.5% growth per year since WW2, Investment, R&D, Education & Training, Population Growth

Pos + Neg output gaps, Trend + Actual growth, Trend = Normal rate of capacity utilisation, Recession periods (NoG) firms sack workers and incomes fall, Recession = real output falls for two consecutive quarters, = rising unemployment, = lower incomes, = less demand, = lower inflation, Lower taxes, higher gov spending, lower interest rates, Boom periods (PoG) firms use Factors of P very intensively, = falling unemployment, = higher incomes, = higher demand, = higher inflation, Higher taxes, lower gov spending, higher interest rates

Supply Side Policies, Increase the supply side of an economy, Lower trade union power, Privatisation, lower income tax

Circular Flow of Income

Chapter 2 - Economic Growth

National Output = National Expenditure = National Income

Value of Total Production (Within domestic boundaries of UK) = GDP, Nominal, Real = nominal - inflation, However, GDP doesnt include returns from overseas assets (eg BP Angola)

All Income = GNP, GNP = GDP + net property income from abroad

Long Term Economic Growth = An increase in the potential level of real output the economy can produce over a given period of time

Increase in total productive capacity (PPF outward shift)

Supply side policies

Improved supply = economy can grow at a more rapid rate, however there must be sufficient demand

Short Term Economic Growth = The percentage change in real GDP

Real National Output = The total value of goods and services produced in an economy over a given time period

Uses the spare capacity in an economy (moving onto the PPF, by reducing unemployment for example)

GDP/GDP Growth

GDP growth is not the same as GDP

GDP measures the level of national output

GDP growth measures how much real GDP has risen or fallen in a given time period, and is expressed as a percentage, Recessions cause an economy to grow less fast

Movement in LRAS = long term economic growth

Demand side / Supply side policies

Demand side = Monetary & Fiscal

Supply side = Some Fiscal + others


Aggregate Demand = C+I+G+(X-M), Consumer Spending, + Investment, + Government Spending, + (Total Exports - Total Imports)

Aggregate Supply = The total level of output supplied within an economy at any given price, SRAS = The level of output firms are prepared to produce an each price level (normal upwards sloping supply curve), LRAS = The normal capacity level of output of the economy

Chapter 3 - Unemployment

In the population of working age, out of work and actively seeking employment

People who are not seeking employment are economically inactive

Claimant Count & Labour Survey

Used to measure unemployment

Causes, Types and Solutions

Cyclical, Cyclical or Keynesian unemployment, also known as deficient-demand unemployment, occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work., Demand side policies to counter cyclical unemployment.

Structural, Structural unemployment occurs when a labour market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs., Improve and promote policies which promote occupational and geographical mobility. Supply side policies eg training will also reduce structural unemployment.

Frictional, Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another., Firstly, increasing the knowledge of the local vacancies through government funded 'job centres' could reduce time between jobs. Secondly, increasing the incentive to search for suitable jobs (such as reducing unemployment benefits and lower taxes on wages) could serve the dual purpose of increasing incentives to search for work, and making more vacancies acceptable to the unemployed individuals.

Seasonal, Seasonal employment refers to a situation where a number of persons are not able to find jobs during some months of the year, No solutioin for seasonal.

Classical, Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level, causing the number of job-seekers to exceed the number of vacancies., Lower real wages

General Solutions

Cyclical, Demand side policies.

Structural, Frictional, Seasonal, Classical, Supply side policies.

Consequences of Unemployment

Loss of income for an individual.

skills lost when unemployed.

Benefits must be paye to unemployed people.

Tax revenue is lost by the government.

Economy loses the forgone output

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