New Homework:

1) What special ‘one-off’ factors help to explain why the underlying growth in
2011Q2 may have been higher than 0.2%?

• Hopefully, there will be no natural catastrophy next year in any of Brotain's major trade partners (referring to Japan).
• Also, next summer is more likely to be "mild" rather than extremely hot.
• Finally, there is no royal wedding planned for next year. (unless Pippa marries Harry:)

2) Why is the output gap rising? How may supply-side changes affect the size of

the output gap?

New jobs are being created, and no "special circumstances" are being taken intoaccount. Government also aims to increase pending in subsidies for businesses and hopefully they will cut the benefits and increase the retirement age. These factors of supply side policy create a more positive predictions for the future output indexes.

3) Why is the recovery from recession in the UK slower than in most other

countries? Why is it slower than the recovery from previous recessions?

Mostly because of the size of the crisis. This global economic slow down causes that not only the UK is in crisis, but also all of their major trade partners. Additionally, the UK is in the EU, where some countries (PIGS) are slowing down the rest. These deeper economic interdependences cause slow down of the recovery pace.

4) How may automatic fiscal stabilisers affect (a) economic growth and (b) the size

of the public-sector deficit if the output gap widens?

Automatic Stabilisers

Definition Automatic stabilisers: Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
Example of Automatic stabilizers

High Growth - In a period of high economic growth, automatic stabilizers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues - people earn more and so pay more income tax (note the tax rate doesn't change, the % just becomes higher). With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment benefits.

Recession - In a recession, the economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes people pay less tax, and government spending on unemployment benefits will increase.

Source: Economicshelp.com




5) Distinguish between demand-side and supply-side causes of the slow rate of
economic growth in the UK.


Supply side: High benefits and powerful trade unions. Limited training of the nemployed.

Demand side: Lack of confidence, therefore lower borrowing. People are not sure about their futore, so even if they are not wore-off, due to the crisis, they are rather paying their debts back and save for taugher times (Keyns's Paradox)


6) Compare the likely effectiveness of demand-side and supply-side policy measures
to stimulate economic growth, referring to both magnitude and timing.


In long short term run, it is more important to restore confidence and demand. The economy has, therefore, more "fuel" to run. For long term stability, supply side policy is crucial. Some reform and new mechanism need to be applied, combining with consolidation of public expenditure. For example, more training of the unemployed, higher quality of education (especially for demanded jobs) and some major gov. investments (f.e. London Olympic Games).