7.5 Macro Flashcards
What does the Phillips Curve look like?
A downwards curve to the right
What does the Phillips Curve show?
The relationship between inflation and employment
It helped to establish that one of the key cause of inflation was excessive aggregate demand
E.g. Employment increase leads to a rise in AD and demand-pull inflation
What does the short-run Phillips Curve show?
The short-run Phillips curve showed that as unemployment fell, aggregate demand would rise and so create inflationary pressure
What does the long-run Phillips Curve look like?
A straight vertical line
What does the long-run Phillips Curve show?
Shows that trade-offs between inflation and unemployment are not possible
What does the LRPC demonstrate?
The LRPC demonstrates that improvements must be made to the supply-side of the economy
What do governments wish to aim for and what do they do to achieve it?
If governments wish to aim for both low unemployment and low inflation, they need to carefully balance both demand- and supply-side management policies
What happens if the government wishes to reduce the natural rate of unemployment?
If the government wishes to reduce the natural rate of unemployment, then policies that enhance the supply side of the economy and labour market are more appropriate
What might these policies include?
Education and training to enhance skills and employability
Reducing JSA to enhance incentives to work and reduce the unemployment trap
Encourage firms to offer flexible working patterns
Improve job centres/job information to help workers
Improve geographical mobility through e.g. affordable housing
Which policies need increased AD?
Short run economic growth - spending and income are closely connected
Reducing cyclical unemployment - jobs depend on the level of spending
Reducing budget deficit - easier with higher spending, collect more tax
Which policies need decreased AD?
Demand pull inflation
Improving the CA - will occur if imports are lower if spending falls
Reducing budget deficit - lower government spending - disputed
What are the common conflicts?
Minimising unemployment and low stable inflation
Increasing economic growth and achieving a balance on the CA
Reducing the budget deficit through cuts in government spending and achieving economic growth and minimising unemployment
Do these conflicts happen in the long-run?
Some argue that they do not
In the LR the economy should be operating on the LRAS meaning that there is no cyclical unemployment, if there is no cyclical unemployment there is no need to increase AD
