CGMA BA1 Fundamentals of Business Economics - Macroeconomic context of business II Flashcards
What does the Retail Price Index (RPI) compare?
It compares the price of a basket of goods against a similar basket in 1987 (the base year). The basket includes food, alcohol, tobacco, DVDs, and household goods.
What is the purpose of the Retail Price Index (RPI)?
It is used as a general measure of inflation.
What happens if RPIX inflation moves 1% either side of the 2% target in the UK?
The Governor of the Bank of England must write an open letter to the Chancellor explaining the reasons for the inflation undershoot/overshoot and the steps being taken to return inflation to the target range.
What is the consequence of not controlling inflation?
The consequences can be wide-ranging, including economic instability, decreased purchasing power, and other negative effects on the economy.
How do people on fixed incomes (e.g., pensioners) suffer during periods of higher inflation?
People on fixed incomes often suffer because even though they may receive some inflationary rise, it usually doesn’t match the true increase in costs they face due to their buying patterns.
How do borrowers benefit in times of high inflation?
Borrowers benefit because the ‘real’ value of their debt decreases, making it easier to repay loans.
How do savers suffer during periods of high inflation?
Savers suffer because the value of money in a bank account declines over time due to inflation, unless the interest rate rises to match or counteract the increase in prices.
What impact does higher inflation in the UK have on exports and employment?
Higher inflation in the UK makes UK goods relatively more expensive, while foreign goods become cheaper, leading to a decrease in exports and potentially harming UK employment.
How may higher inflation be corrected in terms of exchange rates?
A potential correction could come from a weakening of the British pound (£) relative to the dollar ($).
What is cost-push inflation?
Cost-push inflation occurs when firms increase prices to maintain or protect profit margins after experiencing a rise in their costs of production.
What are common input costs that contribute to cost-push inflation?
Common input costs include wages, oil prices, and increased costs of imported goods used in production (import cost-push inflation).
What is a wage-price spiral?
A wage-price spiral occurs when rising wages lead to higher production costs, which then result in higher prices.
What is demand-pull inflation?
Demand-pull inflation occurs when total demand for goods and services exceeds total supply, typically due to excessive growth in aggregate demand.
What is an inflationary gap in demand-pull inflation?
An inflationary gap happens when there is excess demand in the economy, leading to an increase in the general price level due to more money chasing fewer goods.
What happens to national income in demand-pull inflation?
National income in real terms remains the same, as the economy is at full employment, but higher demand leads to higher price levels.
What is the fundamental conflict between reducing unemployment and keeping inflation low?
The conflict arises because attempts to reduce unemployment below the natural rate tend to cause inflationary pressures, as shown by the Phillips curve.
What did Phillips’ research suggest about the relationship between inflation and unemployment?
Phillips’ research indicated an inverse relationship, meaning during periods of low inflation, unemployment was high, and vice versa.
What is the natural rate of unemployment also known as?
The natural rate of unemployment is also called the non-accelerating inflation rate of unemployment (NAIRU).
What did Milton Friedman argue regarding unemployment and inflation?
Friedman argued that efforts to reduce unemployment below a certain level would lead to increased inflation, and in the long run, the Phillips curve would become vertical, indicating no trade-off between inflation and unemployment.
What is the traditional view of fiscal policy?
Fiscal policy is seen as an instrument of demand management, helping to smooth out volatility in national output, particularly after external shocks.
What is the Keynesian view of fiscal policy?
Keynesians argue that fiscal policy can have powerful effects on aggregate demand, output, and employment, especially when the economy is operating below full capacity and needs a demand stimulus.
What do monetarist economists believe about fiscal policy?
Monetarists believe fiscal policy has only a temporary effect on aggregate demand, output, and jobs, and that monetary policy is a more effective tool for controlling demand and inflationary pressure.
What does the fiscal policy transmission mechanism describe?
The fiscal policy transmission mechanism describes how changes in fiscal policy (government spending and taxes) affect variables like aggregate demand, national output, prices, and employment.
What factors affect the multiplier effects of expansionary fiscal policy?
The multiplier effects depend on factors such as spare productive capacity in the economy, how much of the increase in disposable income is spent versus saved, and the effects on interest rates.
