In economics we often see a delay between an economic action and a consequence. This is known as a time lag. An impact of time lags is that the effect of policy may be more difficult to quantify because it takes a period of time to actually occur. Example of time lags Change in interest …
A look at the extent to which policy makers face a trade off between unemployment and inflation. The Phillips curve suggests there is a trade off between inflation and unemployment, at least in the short term. Other economists are more sceptical.
Diagrams showing how shifts in aggregate demand (AD) and aggregate supply (AS) affect macroeconomic equilibrium – real GDP and price level (PL) Includes short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) and classical and Keynesian view of LRAS curves. A simple macroeconomic equilibrium where AD = AS. Increase in AD when economy is close …
Readers Question: When considering national economic policy government must accept that there is a trade-off between inflation and unemployment. Discuss. National Economic Policy will be concerned with these main macro economic objectives Sustained and sustainable economic growth Low Unemployment Low inflation (inflation target often 2%) Low current account deficit (satisfactory balance of payments) Stable Exchange …
Definition: Real wage unemployment occurs when wages are set above the equilibrium level causing the supply of labour to be greater than demand. Classical unemployment of Q1-Q2 caused by a wage NMW above the equilibrium. Classical economists argue the solution is to cut wages to reduce unemployment. For example, a fall in demand for labour …
Readers Question: what is the solution for stagflation? Stagflation occurs when there is an increase in inflation and also at the same time an increase in unemployment and lower economic growth. Typically stagflation will be caused by an increase in the cost of production which shifts the SRAS curve to the left. This could be …
Placing a tax on a good, shifts the supply curve to the left. It leads to a fall in demand and higher price. However, the impact of a tax depends on the elasticity of demand. If demand is inelastic, a higher tax will cause only a small fall in demand. Most of the tax will …
The Neo-classical synthesis (also referred to as the neo-Keynesian theory) refers to the post-war macroeconomic development which combined elements of Keynesian macroeconomics with more classical microeconomic theory. (This is not relevant for A-Level economics, you may be relieved to know) Up until the 1930s, economics had been dominated by classical economists who argued that markets …