H2 Economics Flashcards

What is the AD-AS model used for?

Answer: Analysing macroeconomic equilibrium and the effects of policies on national income, price level, and employment

The AD-AS (Aggregate Demand-Aggregate Supply) model analyses macroeconomic equilibrium, showing how changes in AD or AS affect national income (real GDP), price level, and employment.

What is the 'crowding out' effect?

Answer: When increased government borrowing raises interest rates, reducing private sector investment

Crowding out occurs when government borrowing increases demand for funds in financial markets, raising interest rates, which then reduces private sector investment and consumption.

What distinguishes monopolistic competition from perfect competition?

Answer: Monopolistic competition involves product differentiation and some price-setting power; perfect competition has homogeneous products

Monopolistic competition involves many firms with differentiated products, giving each firm some market power and a downward-sloping demand curve. Perfect competition has homogeneous products and firms are price-takers.

What does 'economic growth' measure?

Answer: An increase in the real GDP of an economy over time

Economic growth refers to an increase in real GDP (GDP adjusted for inflation) over time, representing greater productive capacity and potential for improved living standards.

What is the 'infant industry argument' for protectionism?

Answer: Protecting new domestic industries from foreign competition until they mature and can compete internationally

The infant industry argument justifies temporary protection (tariffs, quotas) for new domestic industries that have potential for comparative advantage but need time to develop economies of scale and compete globally.

What is 'deadweight loss'?

Answer: The loss of economic efficiency (total surplus) that occurs when the optimal output is not produced

Deadweight loss is the loss of total welfare (consumer plus producer surplus) resulting from market distortions such as taxes, price controls, or monopoly pricing, which move output away from the allocatively efficient level.