AQA A2 Economics Unit 4 - June 20th

Competitive advantage is just producing goods at a lower unit cost etc

In what case are budgets self correcting?

In what case are budgets self correcting?

In basic terms, the short run phillips curve shows the general trade off between, unemployment and inflation, at any moment in time, if a government is to reduce the rate of unemplyment, it will have to accept an increase inflation.

Monetarists, however, pointed out that an the phillips curve does not show stagflation, which occured in the 1970s, this is likely to have been the result of a supply side shock, which led to high inflation, high unemployment, and negative output gap, something which was "impossible" according to the Phillips curve. Therefore, the long run phillips curve is a straight vertical line, there is no trade off between inflation and unemployment, and the only way to reduce the natural rate of unemployment, would be to accept an increase inflation. This can be shown by a diagram (which i do not know how to draw here however it should be in your textbook showing a wage-price spiral leading to accelerating inflation) Keynesians believe unemployment is demand deficient, however increases in demand, in the long run do not lead to increase in employment, they lead to increase inflation, with no effect on employment and output.

Therefore, the only way to achieve real economic growth are supply side polices. Cut cooperation tax, lower costs of production, cut income tax, and the education, investment etc. Hope this helps, if anyone can add to do this, or highlight any errors, please do so.

In what case are budgets self correcting?

Cyclical deficits. The notion is that due to automatic stabilisers, the government will receive less tax revenues compared to how much it spends - in unemployment benefit pretty much.

Just think of economic cycles, when the times are good, government gets more tax than it spends due to low unemployment thus lower JSA payouts. During bad times the opposite happens.

Ah right okay thank you and in what ways would export driven growth in countries like China be bad?

Ah right okay thank you and in what ways would export driven growth in countries like China be bad?

What happens to the value of automatic stabilisers during a recession?

If by value, you mean their effectiveness, it depends on how prolonged the period of the recession is. If the recession is short, such as that of a V-Shaped recession curve, then we will see most noticeably a cyclical deficit and, as a result, automatic stabilisers smoothing out any shocks in the economic cycle. This is shown on the budget schedule.

If it is a prolonged recession, automatic stabilisers will have a lesser effect, and their value diminished by the inability for market forces to smooth out something that only economic policy can correct. In this case, the government can either undertake action of Keynesian expansionary fiscal policy, where government spending increases and taxes are cut allowing AD to increase ("spending your way out of a recession") or the monetary suggestion of expansionary monetary policy, such as the £75bn B.O.E quantitative easing injection into the circular flow, where liquidity is injected into the economy and AD is spurred.

In an L-Shaped Recession or a W-Shaped recession however, there may be use of policies which effectively contract fiscal policy, such as the austerity package of the Cameron Government. This essentially brings about a trade-off between social and living standards (Due to recessed public utilities), or the major government spending reduction bringing about new future expectations, encouraging private consumption.

Hoped this helped.

thank you!!!
oh whats the difference between absolute and competitive then? :/

Is this correct? (especially the bit in bold)

If there is a fall in economic growth, there will be a reduction in automatic stabilisers e.g. if people spend less, VAT Receipts will be lower.

What is the impact on the UK of rising oil prices?

This is cost-push inflation, so firms will face higher costs of production, shifting in the SRAS curves. Firms may have to lower wages to compensate the extra costs, and may even fire workers ==> increases unemployment.
Consumers will see higher price levels so consumption will decrease as they lose confidence. And firms have less profit margins to invest so investment falls. Both shift in AD levels.

Can you talk about this causing exports to be uncompetitive as prices are higher, or should it be more supply focussed?

Can someone give me extra points on what to write for this kind of question, with some evaluative points as well please? (+rep available! )
Thanks so much in advance

Also, can anyone clarify, for AQA, do we need to use SRAS/LRAS rather than AS curves? and LRAS shows the maximum capacity the economy can operate at given the factors of production available. The only way to increase it, is to use supply side policies. As for SRAS, this is the amount of goods and services a firm can produce? And shifts are caused by productivity and costs?

You use SRAS/LRAS depending on the question. You will use an AS curve if you are talking about Keynesian economics, as Keynesian doesn't have a LRAS curve. Supply-side policies are designed to shift the PPF outwards, and increase the spare capacity of the economy. SRAS is what the entire economy can produce in the short-run, not a single firm.