inflation and monetary policy

Question 1

what is disinflation

Answer 1

when the inflation rate is falling

Question 2

real interest rate d

Answer 2

interest rate corrected for inflation

Question 3

menu costs d

Answer 3

resources used in setting and changing prices

Question 4

why is deflation bad

Answer 4

people postpone consumption because they expect goods will be cheaper in the future,
increases debt burden of borrowers

Question 5

protectionist policies d

Answer 5

measures taken by a government to limit trade, in particular to reduce the amount of imports

Question 6

what is a wage price spiral

Answer 6

workers anticipate prices to rise so ask for real pay rise so firms have to raise prices in order to maintain profitability

Question 7

what could shift the wage curve upwards

Answer 7

improves generosity of unemployment benefits,

stronger trade unions

Question 8

real wage d

Answer 8

money wage, adjusted to take account of inflation

Question 9

what is the bargaining gap

Answer 9

difference between the wage curve and the profit curve

Question 10

think about the diagram,
x=output
y=aggregate demand,
what shape are the two lines on it

Answer 10

there is the 45 degree line ourput=ad,
there is the AD line which is an upward sloping line that has a positive y intercept (less steep than 45 degree),
y=0.5x+10

Question 11

expected inflation d

Answer 11

opinion that wage and price setters form about the level of inflation in the next period

Question 12

what is the formula for inflation

Answer 12

expected inflation + bargaining gap

Question 13

what happens to the profit curve and inflation if there is an increase in oil prices

Answer 13

profit curve shifts down (to make more profit) and there is a bargaining gap between profit curve and wage curve at that level on employment so inflation (until new post shock inflation stabilising employment rate reached)

Question 14

what are problems with using interest rates to stimulate the economy

Answer 14

time lag,
cant go below zero,
country without own currency doesn’t have own monetary policy

Question 15

how does quantitative easing work

Answer 15

central banks buy securities such as government bonds from banks (with new money),
banks now have more money so should encourage banks to make more loans

Question 16

exchange rate d

Answer 16

number of units of home currency that can be exchanged for one unit of foreign currency

Question 17

how can reducing the interest rate increase ad through the exchange rate

Answer 17

fall in demand for currency,
depreciation,
exports become cheap,
increase trade balance,
increase ad

Question 18

which way round do they do the phillips curve

Answer 18

unemployment decreasing on the y axis,
curve is like a j,
y=x^2

Question 19

Who introduced flying machines to the public

Answer 19

Sir George white

Question 20

When did sir George white introduce flying machines to the world

Answer 20

November 1910

Question 21

What company was sir George white a director of

Answer 21

British and colonial airline company

Question 22

What was significant about flying machines and the downs

Answer 22

He introduced them to the public in November 1910 on the downs and 30,000 people came to watch

Question 23

What was the first plane called from the British and colonial airline company

Answer 23

Bristol biplane which we know as the box kite