CORRECTION RECORD

Unit 2 confirmed corrections

These changes address confirmed errors and inconsistent explanations. Original source documents are preserved. See the evidence correction record for the subsequent review of historical claims.

Measures of Economic Performance

Before: ↑ money supply (e.g. QE) → more money chasing same goods → ↑ AD → ↑ PL

Now: Monetary expansion may raise spending and AD; the price-level response depends on spare capacity and the response of output.

Why: Makes the monetary transmission conditional, consistent with the later QE explanation.

Measures of Economic Performance

Before: Quantitative easing → ↑ money supply → ↑ spending → ↑ PL

Now: QE → lower yields and easier financial conditions → potentially ↑ spending and AD → upward pressure on PL, depending on spare capacity

Why: Makes the monetary transmission conditional, consistent with the later QE explanation.

Measures of Economic Performance

Before: It is temporary and self-resolving — the worker will find a job once a suitable match is found

Now: It is usually short-term: unemployment ends when a suitable job match is found, but the search may take longer if information or vacancies are limited.

Why: Job matching is not guaranteed to resolve itself quickly.

Measures of Economic Performance

Before: because frictional unemployment stems from imperfect information rather than a lack of jobs, the appropriate policy is to improve information flow — e.g. job centres, online job matching platforms, careers advice — rather than demand-side stimulus (which addresses cyclical unemployment) or retraining (which addresses structural/occupational immobility).

Now: Because frictional unemployment arises during job search and matching, improved information — e.g. job centres, online job matching platforms and careers advice — directly addresses the problem. Demand-side stimulus mainly addresses cyclical unemployment, while retraining addresses skills mismatch; these causes can coexist.

Why: Retains the main policy distinction without presenting unemployment types as mutually exclusive.

Measures of Economic Performance

Before: Demand-side stimulus won't create lasting jobs in the declining industry

Now: Demand stimulus alone does not remove skills mismatch; training and spending that supports new employment may complement it.

Why: Policy effectiveness depends on the mechanism and can involve complementary measures; removes the categorical exclusion of other policies.

Measures of Economic Performance

Before: Retraining won't help if workers can't physically move to where jobs are

Now: Retraining alone may be insufficient where location barriers remain; training for accessible jobs can still help.

Why: Policy effectiveness depends on the mechanism and can involve complementary measures; removes the categorical exclusion of other policies.

Measures of Economic Performance

Before: Demand-side stimulus unnecessary — jobs exist, workers just can't find them quickly

Now: Better matching is the direct response; demand support may also be relevant if weak demand coexists.

Why: Policy effectiveness depends on the mechanism and can involve complementary measures; removes the categorical exclusion of other policies.

Measures of Economic Performance

Before: Retraining won't help — the problem is wage level, not worker skills

Now: Training may raise productivity and labour demand, but does not directly remove a wage floor above equilibrium.

Why: Policy effectiveness depends on the mechanism and can involve complementary measures; removes the categorical exclusion of other policies.

Measures of Economic Performance

Before: Balance of payments — a record of all financial transactions between a country and the rest of the world over a given period.

Now: Balance of payments — a record of economic transactions between residents of an economy and non-residents over a given period.

Why: Includes goods, services and income as well as financial transactions; uses residence rather than nationality.

Measures of Economic Performance

Before: Trade in goods, trade in services, investment income, international transfers

Now: Trade in goods and services, primary income and secondary income

Why: Makes the current-account summary consistent with its full definition.

Measures of Economic Performance

Before: Investment income (primary income)

Now: Primary income

Why: Primary income includes compensation of employees as well as investment income.

Measures of Economic Performance

Before: Income earned from abroad minus income paid abroad

Now: Income receivable from non-residents minus income payable to non-residents, including investment income and compensation of employees

Why: Avoids reducing primary income to investment income alone.

Measures of Economic Performance

Before: The country is spending more abroad than it earns.

Now: Current-account payments to non-residents exceed current-account receipts from non-residents.

Why: Restricts the definition to the current account, excluding purchases of foreign financial assets.

Measures of Economic Performance

Before: The country is earning more from abroad than it spends.

Now: Current-account receipts from non-residents exceed current-account payments to non-residents.

Why: Restricts the definition to the current account, excluding financial-account flows.

Measures of Economic Performance

Before: Worsens deficit

Now: May worsen the balance

Why: Harmonises the summary table with the conditional current-account explanation; no single factor guarantees a change in the overall balance.

Measures of Economic Performance

Before: ↑ exchange rate → exports more expensive, imports cheaper → ↓ X, ↑ M → deficit worsens

Now: Appreciation may raise foreign-currency export prices and lower domestic-currency import prices. The effect on trade values depends on price elasticities and pass-through.

Why: Harmonises the summary table with the conditional current-account explanation; no single factor guarantees a change in the overall balance.

Measures of Economic Performance

Before: Worsens deficit

Now: May worsen the balance

Why: Harmonises the summary table with the conditional current-account explanation; no single factor guarantees a change in the overall balance.

Measures of Economic Performance

Before: Improves deficit

Now: May improve the balance

Why: Harmonises the summary table with the conditional current-account explanation; no single factor guarantees a change in the overall balance.

Measures of Economic Performance

Before: Worsens deficit

Now: May worsen the balance

Why: Harmonises the summary table with the conditional current-account explanation; no single factor guarantees a change in the overall balance.

Measures of Economic Performance

Before: Improves deficit

Now: May improve the balance

Why: Harmonises the summary table with the conditional current-account explanation; no single factor guarantees a change in the overall balance.

Measures of Economic Performance

Before: Cyclical unemployment → demand-side policy (↑ G, ↓ interest rates) to ↑ AD. Structural unemployment → supply-side policy (retraining, transport infrastructure). Using demand-side policy for structural unemployment only creates temporary jobs that disappear when stimulus ends.

Now: Cyclical unemployment → demand-side policy (↑ G, ↓ interest rates) to ↑ AD. Structural unemployment → supply-side policy (retraining, transport infrastructure). Demand stimulus alone does not remove skills or location barriers, but it can complement measures that improve matching and support new employment.

Why: Policy effectiveness depends on the mechanism and can involve complementary measures; removes the categorical exclusion of other policies.

Measures of Economic Performance

Before: ↑ exchange rate → exports more expensive for foreign buyers, imports cheaper for domestic buyers → ↓ X, ↑ M → current account deficit worsens. Conversely, depreciation → exports cheaper, imports dearer → ↑ X, ↓ M → deficit improves.

Now: ↑ exchange rate → exports may become more expensive for foreign buyers and imports cheaper for domestic buyers → export volumes may fall and import volumes rise. The effect on the current-account balance depends on price elasticities, pass-through and income flows. Depreciation can improve the trade balance under the standard Marshall–Lerner conditions, after time for volumes to adjust.

Why: Exchange-rate changes do not automatically improve or worsen the current-account balance.

Measures of Economic Performance

Before: ↑ GDP → ↑ disposable income → consumers spend more on imports (high marginal propensity to import) → ↑ M → current account deficit worsens. This is why fast-growing economies often run current account deficits.

Now: ↑ GDP → ↑ disposable income → spending on imports may rise, especially with a high marginal propensity to import → downward pressure on the current-account balance, other things equal. Export growth and income flows may offset this effect.

Why: Separates a plausible import mechanism from a necessary current-account deficit.

Measures of Economic Performance

Before: Persistent deficit → financed by selling domestic assets/borrowing from abroad → ↑ foreign ownership → investment income outflows in future → future current account worsens → deficit becomes structural.

Now: A persistent deficit may be financed by borrowing or selling assets to non-residents. Future interest, dividend or profit payments can increase primary-income outflows and make the deficit harder to reduce; productive investment may also raise future income and exports.

Why: Foreign financing creates a possible feedback, not an automatic structural deficit.

Measures of Economic Performance

Before: Persistent deficit → foreign investors lose confidence → ↓ demand for domestic currency → depreciation → imports more expensive → cost-push inflation → ↓ SRAS → ↓ economic growth. This is why large deficits can trigger a currency crisis.

Now: A persistent deficit financed by volatile capital inflows can increase vulnerability to a loss of investor confidence. If those inflows reverse, downward pressure on the currency may raise import prices and production costs. A currency crisis is a risk, not an inevitable consequence of a deficit.

Why: Replaces a deterministic chain with the financing and confidence conditions needed for it.

Measures of Economic Performance

Before: Evaluation — is a deficit always a problem? A deficit is NOT always a problem if it is small, temporary, and driven by importing capital goods that ↑ future productive capacity. It IS a problem if it is large, persistent, and financed by short-term borrowing (hot money) that can reverse quickly.

Now: Evaluation — is a deficit always a problem? A small or temporary deficit driven by imports of productive capital goods may be sustainable. A large, persistent deficit financed by short-term borrowing is more vulnerable to a reversal of inflows. Assess the cause, financing, repayment capacity and likely future export earnings.

Why: Deficit size and financing indicate vulnerability rather than proving unsustainability.

Aggregate Demand

Before: → Depreciation makes exports cheaper in foreign currency and imports dearer in domestic currency → BUT the trade balance only improves if the total demand for exports and imports is price elastic (PED_X + PED_M > 1)

Now: → Depreciation can make exports cheaper in foreign currency and imports dearer in domestic currency → under the standard Marshall–Lerner assumptions, including initially balanced trade and full price pass-through, the trade balance improves if |PED_X| + |PED_M| > 1.

Why: Uses absolute elasticities and states the assumptions behind the standard condition.

Aggregate Demand

Before: → If demand is inelastic → the volume of exports/imports barely changes, but export revenue falls (lower price × similar quantity) and import spending rises → trade balance worsens (J-curve effect: short-run deterioration before long-run improvement)

Now: → In the short run, contracts and inelastic demand may limit volume changes → measured in domestic currency, the import bill may rise before export receipts increase enough to offset it. Export receipts do not necessarily fall simply because the foreign-currency export price falls. A J-curve occurs if an initial deterioration is followed by improvement as volumes adjust sufficiently.

Why: Removes mixed-currency revenue reasoning and avoids implying that a later improvement is guaranteed.

Aggregate Supply

Before: Vertical at all output levels

Now: Vertical at potential output (Yfe)

Why: A vertical LRAS has one output coordinate, not every output level.

Aggregate Supply

Before: ↑ investment in technology (an LRAS shifter) → ↑ long-run productive capacity AND ↓ short-run production costs (more efficient processes) → both LRAS and SRAS shift right

Now: ↑ investment in technology → potentially ↑ productive capacity as the technology becomes usable → if it also lowers unit costs, SRAS shifts right. The timing and scale of the two effects may differ.

Why: New investment does not automatically lower current production costs immediately.

Aggregate Supply

Before: Lower costs now AND expanded capacity for the future

Now: Can expand capacity as investment becomes usable; SRAS shifts right if unit costs fall.

Why: Removes the unsupported assumption that investment lowers costs now.

Aggregate Supply

Before: Yes

Now: May do, as unit costs fall

Why: Aligns the table with the qualified timing explanation.

Aggregate Supply

Before: Common mistake: don't assume every SRAS shifter also shifts LRAS — a temporary cost change (oil prices, exchange rate, tax/subsidy, wages) moves SRAS only, while a change in the quantity/quality of factors of production (productivity, technology, education) moves both.

Now: Common mistake: don't assume every SRAS shifter also shifts LRAS. A temporary input-cost change can shift SRAS without changing productive capacity. A change in the quantity or quality of factors of production can shift LRAS and may also shift SRAS, depending on its effect on unit costs and when the resources become usable.

Why: Aligns the recap with the correct qualifications in blocks 740–741.

Measures of Economic Performance

Before: → If the question shows ↑ PL AND ↑ real GDP → demand-pull inflation (AD shifted right)

Now: ↑ price level and ↑ real GDP are consistent with an increase in AD when SRAS is unchanged. They do not alone prove the cause: use the extract to identify the spending change and consider simultaneous supply shifts.

Why: State the one-shock model assumption.

Measures of Economic Performance

Before: → If the question shows ↑ PL BUT ↓ real GDP → cost-push inflation (SRAS shifted left)

Now: ↑ price level and ↓ real GDP are consistent with an adverse SRAS shift when AD is unchanged. Check the evidence for higher costs or disrupted production before attributing the outcome to cost-push inflation.

Why: Observed outcomes do not uniquely identify a shock.

Measures of Economic Performance

Before: → This distinction matters because the policy response is different: demand-pull → tighten AD (↑ interest rates); cost-push → address supply-side costs

Now: Policy depends on the source of inflation. Demand restraint addresses excessive spending; supply measures may address production constraints. With combined shocks, assess the trade-off between reducing inflation and supporting output.

Why: Avoid a rigid one-outcome/one-policy rule.

Measures of Economic Performance

Before: Those on fixed incomes (pensioners, welfare recipients) suffer most because their income does not adjust to rising prices

Now: People whose nominal incomes fail to keep pace with their living costs lose purchasing power. Some pensions and benefits are uprated, although delays and differences in household spending patterns can leave recipients exposed.

Why: Distinguish fixed nominal incomes from pensioner or benefit-recipient status.

Measures of Economic Performance

Before: Inflation redistributes wealth from savers (real value of savings ↓) to borrowers (real value of debt ↓) → those on fixed incomes (pensioners) are worst affected → ↑ inequality

Now: Unexpected inflation can reduce the real value of fixed nominal debts and financial assets. Effects on inequality depend on asset and debt holdings, interest rates, wage adjustments and income indexation; pensioners are not uniformly on incomes that never rise.

Why: Align the summary with the qualified explanation and indexation discussion.

Aggregate Supply

Before: If a data response question mentions rising oil prices, a weaker currency, or higher business taxes, this is a SRAS-shift signal, not a demand-side signal.

Now: Rising input prices may shift SRAS left, but a shock can affect demand as well as supply. A weaker currency can raise imported-input costs and also influence net exports; business-tax changes may affect investment. Identify each channel supported by the extract.

Why: Exchange-rate and tax shocks need not be supply-only.

National Income

Before: The accelerator effect: the principle that investment depends on the rate of change of demand, not its level.

Now: The accelerator effect: changes in demand or output growth influence induced investment in additional capacity, subject to expectations and existing spare capacity.

Why: Distinguish induced investment from total investment.

National Income

Before: The accelerator effect is the principle that the level of investment depends not on the level of demand, but on the rate of change of demand.

Now: The accelerator effect links induced investment to changes in demand or output. In the simple model, a faster increase in output requires a larger addition to the capital stock; replacement investment is a separate component.

Why: Clarify the simple accelerator mechanism.

National Income

Before: When demand is growing rapidly, firms invest heavily to expand capacity to meet expected future demand; when the rate of growth of demand slows — even if demand is still positive — investment can fall sharply.

Now: When firms expect demand to grow faster, they may invest in additional capacity. If demand is still growing but more slowly, less new capacity may be needed, so induced investment can fall. Existing spare capacity and expectations affect the response.

Why: Distinguish a positive level of demand from continuing growth.

Monetary Policy

Before: the impact of a rate change or QE relies on commercial banks actually passing changes on to their own lending and savings rates and being willing to lend more — after a financial crisis, banks may stay risk-averse and tighten lending criteria regardless of the base rate, weakening the transmission mechanism.

Now: Cautious banks or weak loan demand can weaken the bank-lending channel: lending rates may adjust incompletely and cheaper finance may not produce more borrowing. QE can also work through bond yields, portfolio rebalancing, asset prices and expectations, so additional bank lending is not required for every channel to operate.

Why: Align QE evaluation with its multiple transmission channels.