Definition
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Answer
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Occurs when over time an economy expands its capacity to produce goods and services.
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Economic Growth
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An increase in production of goods and services because the available resources within an economy are used more fully.
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Short-run Economic Growth
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Refers to an increase in an economy's productive potential and is what is normally meant by the term 'economic growth'.
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Long-run Economic Growth
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Describes the problems experienced by third parties as a consequence of an economic activity. These problems can be passed on as a result of the consumption or production of a product.
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Negative Externalities
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Occurs when an economy's actual level of GDP shows a regular pattern of variation compared with it's long-term trend.
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The Economic Cycle
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States that the level of planned investment depends upon the rate of change of national income.
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The Accelerator Theory of Investment
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Occurs when those taking financial decisions operate without sufficient thought and act in the belief that a large group of people are unlikely to be wrong.
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Herding Instinct
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A high-risk financial activity in a pursuit of a potentially substantial gain.
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Speculation
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Unexpected factors that affect aggregate demand negatively or positively.
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Demand-side Shocks
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Unexpected factors that affect aggregate supply negatively or positively.
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Supply-side Shocks
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Exists when people are seeking work but are unable to find it.
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Unemployment
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Unemployment arising from a fall in aggregate demand.
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Cyclical Unemployment
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Exists when workers are in the process of moving to a new job.
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Frictional Unemployment
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Occurs when workers leave the labour market against their wishes.
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Involuntary Unemployment
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The loss of jobs resulting from the long-term decline of specific industries.
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Structural Unemployment
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Unemployment that exhibits regular and predictable fluctuations throughout the year.
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Seasonal Unemployment
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Occurs when workers take a decision not to enter the labour market at the current wage rate.
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Voluntary Unemployment
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Exists when the real wages for workers in an economy are too high, leaving firms unwilling to employ everyone who is looking for a job.
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Real Wage Unemployment
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An organisation formed with the objective of enhancing and protecting the working conditions and economic positions of its members.
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A Trade Union
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The percentage difference in average gross hourly earnings between union members and non-members.
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The Trade Union Wage Premium
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The level of unemployment that exists when the labour market is in equilibrium.
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The Natural Rate of Unemployment
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Measures the ease with which labour moves from one productive use to another.
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Labour Mobility
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Describes a situation in which periods of high unemployment tend to increase the rate of unemployment, below which inflation begins to accelerate, commonly referred to as NAIRU.
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Hysteresis
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The rate of increase of the general price level and the corresponding fall in the value of money.
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Inflation
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Occurs when prices are rising, but at a decreasing rate.
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Disinflation
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The rate of decrease of the general price level and the corresponding rise in the value of money.
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Deflation
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States that increases in the money supply within an economy will result in increases in the general level of prices.
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The Quantity Theory of Money
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An equation which sets out the relationship between money, the frequency with which it is spent and the value of transactions in an economy.
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Fisher's Equation of Exchange
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A school of thought that supports the close control of the money supply based on the belief that increases in this supply result in inflation.
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Monetarism
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Theories that state that firms and households use past information as the best indicator of future events.
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Adaptive Expectations
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Based on the assumption that decision makers use all available information - past, current and forecasted - before reaching judgements.
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Rational Expectations Theories
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A basic product for which there is global demand and which is often used in the manufacturing process.
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A Commodity
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Illustrates the relationship between the rates of inflation and unemployment that may exist within an economy.
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The Phillips Curve
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The percentage of economically active people within a country who are unemployed.
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The Rate of Unemployment
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Takes place when individuals and firms do not distinguish between nominal and real values of money when taking decisions.
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Money Illusion
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Stands for non-accelerating inflation rate of unemployment and is the rate of unemployment that is associated with stable rates of inflation.
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NAIRU
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Intended to increase aggregate supply by improving the effectiveness of markets.
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Supply-side Policies
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