Inflation and unemployment

Question 1

Define unemployment

Answer 1

where workers don’t have jobs but are willing and able to work

Question 2

unemployment rate

Answer 2

% of labour force (employed + unemployed) that are unemployed

Question 3

define Deflation

Answer 3

a general fall in the average price levels of goods and services (negative inflation)

Question 4

Define Inflation rate

Answer 4

The % by which price levels have increased for the latest month with the same month a year ago

Question 5

Define CPI (consumer price index)

Answer 5

The mechanism for measuring inflation in the UK

Question 6

Define disinflation

Answer 6

When the inflation rate is falling but still positive. In other words the price level is increasing but at a slower rate than before

Question 7

Define cost push inflation

Answer 7

Inflation caused by an increase in the cost of factors of production

Question 8

Define demand pull inflation

Answer 8

caused by increases in AD- too much money chasing too few goods

Question 9

Define recession

Answer 9

Two consecutive quarters of negative growth (fall) in GDP

Question 10

Define structural unemployment (geographical and occupational immobilities)

Answer 10

: Unemployment caused by lack of mobility in the labour market. (There are spare jobs but the unemployed lack the knowledge or skills needed to fill them- occupational or geographical immobility)

Geographical= jobs and labour are not located in the same place

Occupational= labour and required labour do not match

Question 11

Define frictional unemployment

Answer 11

unemployment which exists in any economy due to people being in the process of moving from one job to another. Frictional unemployment will always exist which is why 4% unemployment rate is considered full employment

Question 12

Consequences of unemployment

Answer 12

The economy is not at full capacity (operating inside its PPF), lower economic growth and lost potential growth.

Hysterisis- unemployment breeds unemployment (families teach their children to be unemployed)

Unemployment shifts AD to the left

Question 13

Consequences of inflation

Answer 13

• Inflation reduces business and consumer confidence, which can lower AD
• undermines the value of money and reduces quality of life for people with fixed wages
• Leads to further inflation eg menu costs (time and money spent changing prices)

Question 14

CPI v RPI

Answer 14

RPI= retail price index, calculated using survey of 6000 households to measure living costs

CPI= consumer price index, measures basket of goods again (excluding council tax and mortgage repayments) and items with higher proportion of income spent have more weighting (affect inflation more) Uses larger sample than RPI and is usually lower.

Question 15

Solving cyclical and structural unemployment

Answer 15

Cyclical- unemployment caused by recessions. Increased G (government expenditure) will get the economy out of recession and provide more jobs

Structural unemployment- solved by supply side policies eg increased labour market flexibility, improved education

Question 16

How is inflation controlled?

Answer 16

Monetary policy- Bank of England can raise interest rates, to reduce borrowing incentives of businesses and consumers, reducing demand pull inflation. This should also raise exchange rates, SPICED, makes imports cheaper which will decrease costs for businesses of factors of production, reducing cost push inflation.

Question 17

How is CPI different to RPI

Answer 17

• Excludes council tax and mortgage repayments
• different formula to rpi
• larger sample of population too, and usually comes out lower