2.8 The Phillips Curve Flashcards
What is the natural rate of unemployment?
The level of unemployment that exists when the economy is at full employment, where all resources are utilised efficiently without causing inflation.
What does NAIRU stand for?
Non-accelerating inflation rate of unemployment.
What are the Keynesian approaches to unemployment?
Focus on demand-side policies to influence output and employment.
What are the neo-classical approaches to aggregate supply?
Emphasise supply-side factors and the role of market forces in determining output.
What is the short-run Phillips curve?
Illustrates the inverse relationship between inflation and unemployment in the short term.
What is the long-run Phillips curve?
Shows that in the long run, there is no trade-off between inflation and unemployment; it is vertical at the natural rate of unemployment.
Evaluate the usefulness of the Phillips curve for macroeconomic policymakers.
It provides insights into the trade-off between inflation and unemployment but may not hold in all economic conditions.
What is the definition of unemployment?
The situation where individuals who are capable of working are unable to find a job.
Who are the economically inactive?
Individuals not in work and not available for work, typically aged 16-64.
Who are the workforce?
The segment of the population that is available for work and actively seeking employment.
Who are discouraged workers?
Individuals who have stopped looking for work due to believing no jobs are available for them.
How is the unemployment level measured in the UK?
Through the claimant count and administrative data such as the Labour Force Survey.
What are the potential problems with different measures of unemployment?
They may not capture underemployment, discouraged workers, or those not actively seeking jobs. Not all unemployed claim benefits.
How many people in the UK are considered economically inactive?
Approximately 8.5 million individuals aged 16-64.
Name the causes of unemployment in the UK.
- Cyclical unemployment
- Structural unemployment
- Seasonal unemployment
- Frictional unemployment
What are the consequences of unemployment for individuals?
Loss of income, decreased self-esteem, and potential social exclusion.
What are the consequences of unemployment for the state?
Increased welfare costs, decreased tax revenue, and potential social unrest.
What is inflation?
The rate at which the general level of prices for goods and services is rising.
What is disinflation?
A reduction in the rate of inflation.
What is deflation?
A decrease in the general price level of goods and services.
What is hyperinflation?
An extremely high and typically accelerating inflation rate.
Name two causes of inflation.
- Demand-pull inflation
- Cost-push inflation
How is inflation measured?
Using indices such as the Consumer Price Index (CPI) and the Retail Price Index (RPI).
How many goods are in the virtual basket of goods used to measure inflation?
Approximately 700 goods.
How often is inflation calculated?
Monthly.
How often is the basket of goods adjusted?
Annually.
What is the difference between CPI and RPI?
CPI does not include housing costs, while RPI does.
Identify one demand management policy to reduce inflation.
Contractionary monetary policy.
Identify one demand management policy to reduce unemployment.
Expansionary fiscal policy.
What are the implications of the Phillips curve for government policy?
Policymakers can choose between different levels of unemployment and inflation.
What happens to money wages at high levels of unemployment?
They tend to stagnate or decrease.
What happens to money wages at low levels of unemployment?
They tend to increase as workers demand higher wages.
What does it mean that money wages are sticky downwards?
Wages do not easily decrease even when unemployment is high.
What is stagflation?
A situation of high inflation combined with high unemployment.
What do cost-push theorists argue about the Phillips curve?
The trade-off exists at higher rates of inflation and unemployment.
What are incomes policies?
Strategies aimed at controlling wage and price inflation.
What is the expectations-augmented Phillips curve?
A modification of the Phillips curve that includes inflation expectations.
What is money illusion?
The tendency of people to confuse nominal wage increases with real wage increases.
What is the long-run Phillips curve (LRPC)?
A vertical line representing the natural rate of unemployment where inflation does not affect unemployment.
What factors can cause shifts in the Phillips curve?
- Changes in inflation expectations
- Exogenous shocks
- Macroeconomic policy mismanagement
